Monetary Policy and the Convergence to Low Inflation : A Small Macro Model for Hungary and Poland, 1991-1998

We estimate two parsimonious structural models for inflation, the output gap, the domestic interest rate and the exchange rate for Hungary and Poland, for the period of "transition" (1991-1998). The empirical analysis shows that, at the aggregate level, the transmission of monetary policy impulses to macro variables may be characterized in a similar fashion to that of advanced open industrial countries. We highlight similarities and differences between the two countries under study and with other industrial countries studied in the recent literature. We draw several conclusions on understanding and modeling the effects of monetary policy, and also on the desirable design of policy rules, during the process of disinflation