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The Fisher effect at the borders of the European Monetary Union : evidence from post-communist countries

This paper aims to shed some light on the Fisher effect in six non-eurozone post-communist economies (the Czech Republic, Hungary, Latvia, Lithuania, Poland and Romania). A Fisher-type interest rate equation is analyzed utilizing the PMG panel data estimator, also offering an early attempt to employ the Harmonized European Consumer Surveys in quantifying inflation expectations and uncertainty. The output gap is as well considered as an explanatory variable. The results of the Hausman poolability test unambiguously confirm that despite the differences in their monetary regimes and the development levels of their financial markets all observed countries are homogeneous in terms of the Fisher effect. It is proven that both inflation uncertainty and expectations positively and significantly feed into nominal interest rates fluctuations. The post-communist central banks seem to be the most strongly concerned about inflation uncertainty shocks, while their interest rate elasticity with regards to expected inflation is below unity. On the other hand, they do not significantly adjust their interest rates in response to demand-side pressure, assigning only a secondary role to boosting economic activity. As a robustness check, the obtained results remain rather similar when Sweden and the UK (as the remaining non-eurozone EU members) are included in the sample.

Fisher equation; PMG panel data estimator; money market interest rate; expected inflation; inflation uncertainty

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