Abstract

Implications of Alternative Monetary and Exchange Rate Policy Rules in the Transformation Process

In view of the catastrophical experiences gained in developing countries and in light of various economic theories, it must be deemed surprising that fixed exchange rates have been proposed (and partly introduced) for stabilizing the economies also of the Eastern European reform states. This contribution shows that a stabilization programme based on fixed rates of exchange - does not bind monetary policy in the short term and, respectively, is not consistent with overall economic restrictions, - leaves a credibility gap compared with flexible exchange rates apart from a monetary union, which is likely to be out of reach for most countries in Eastern Europe, - gives rise to the expectation of considerable growth losses with a resultant adjustment requirement. For this reason, flexible exchange rates are recommendable for the reform states in Eastern Europe. Defining maximum acceptable rates of inflation or a fixed money supply rule would be eligible as anominal monetary policy anchor. Institutionalizing an anti-inflationary policy with the help of anindependent central bank and ensuring free competition ought to be a long-term objectives. However, as long as monetary policy is not truly independent from fiscal policy, expectations for both policy areas should be stabilized by a money supply rule consistent with the existing restrictions