The Impact of Monetary Policy Institutional Decisions on Convergence in Central and Eastern European Countries

Our study looks at the role of monetary policy related institutional decisions in the nominal and real convergence of the 11 former socialist Central and Eastern European EU Member States over the three decades following their regime change. We use our empirical model to estimate the impact of four key drivers of the monetary policy framework (exchange rate regime, central bank independence, inflation targeting, euro adoption) on inflation and real economic growth. Our main finding is that the convergence rate over the past decades has had little to do with the choice of exchange rate regime or the potential adoption of the euro or inflation targeting and much more with the establishment of central bank independence. The latter has reduced inflation by roughly 5 percentage points, while boosting real GDP growth by about 2 percentage points. This suggests that central bank independence significantly enhances the credibility and predictability of monetary policy and largely determines the success of each monetary regime.