Multivariate approach to determination of intermediate target of monetary policy strategy in CEE countries

Abstract

The main aim of this paper is to investigate the characteristics of Central and East European (CEE) countries considering their choice of an intermediate target of the monetary policy strategy. A theoretical choice of the intermediate target of the monetary policy strategy refers to inflation targeting, exchange rate targeting and monetary targeting, with the latter not being a practical choice in these countries. This research tends to find out whether this choice means different economic characteristics considering macroeconomic and financial variables, and whether the choice of an individual intermediate target implies better overall economic performance. Eleven characteristics are classified for 14 chosen CEE countries, using the multivariate and multicriteria approaches. The research was conducted in four years (2005, 2007, 2009 and 2011) in order to see whether performance and ranking of countries change when taking into account the financial crisis. The results show that, when considering all 11 indicators, countries cannot be classified into two equal clusters considering the choice of the intermediate target. However, when clustering is done using foreign currency denominated loans and three forms of central bank independence, results show that countries are clustered according to our expectations, i.e., foreign currency denominated loans and two forms of central bank independence contribute to a difference between countries. Furthermore, countries were ranked considering overall economic performance, but no significant difference considering the choice of the intermediate target was found.