MONETARY POLICY CONVERGENCE IN THE PRE- AND POSTINTEGRATION PERIOD. CASE OF BALTIC STATES AND POLAND

Abstract

Economic integration is perceived as a multi-phase process in which national economic policies of a group of countries or territories are systematically coordinated and substituted by common policies. We can observe that this world-wide tendency to create regional free-trade agreements, common markets and monetary unions is beneficial for their participants. It is widely recognized that benefits from coordination and giving up national policy independence exceed costs, both economic and social ones. It can be argued that the European Union and the European Monetary Union are the role models of economic integration.
In the course of integrating New Member States that joined the EU in 2004, and later, one can expect that both nominal and real convergence takes place. This is of high importance especially for those countries, which intend to join the EMU soon. There is a set of nominal criteria to be met, but their economic justification is not clear. They are not associated with the optimality criteria of the classical Optimal Currency Area theory. Despite they are intended to induce convergence, many economists criticize them as too strict in terms of their definitions. As a half of century of experience of the non-European monetary unions tells us (Młodkowski 2007), neither inflation nor fiscal deficit represents a reason for rejecting a prospect member. It is argued that compliance with any of the criteria is achievable at lower costs (social and political) after full monetary integration due to endogenity. What matters is the monetary policy stance convergence in the pre-integration period among monetary union member states. Only then substituting domestic monetary policy with a common one will not generate any shocks for the underlying economies. Therefore, it would be reasonable to reform the current set of nominal convergence criteria and introduce a new one, covering monetary policy stance convergence.
In order to implement this idea a convenient, simple and easy to understand method is required for capturing monetary situation. The literature on measuring restrictiveness of monetary policy is vast and still growing. One of the newest approaches that could be quite convenient for the proposed reform is based on an alternative interpretation of the money velocity short-term shocks. According to Reynard (2007) these are fully a reflection of monetary policy. The paper utilizes the Monetary Policy Stance Indicator created and developed by Młodkowski (2007, 2008a, 2008b, 2009) to present tendencies in monetary policy restrictiveness in four countries: Estonia, Latvia, Lithuania and Poland over the period from 1998 to 2008. Hypothesis posed deals with expected tendencies in domestic policies in countries that were advancing in economic integration and became full members of the EU in 2004. Similarities and differences in monetary policy stance should be attributable to some global events and regional developments. Data source for the empirical study is the International Financial Statistics by the International Monetary Fund (January 2009). Statistical methods cover simple correlation and co integration analysis of time series representing monetary policy stance in a form of the MPSI.