DP1195 | Macroeconomic Policy in Central Europe

Publication Date

31/08/1995

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Abstract

Our focus in this paper is macroeconomic policy in the countries of Central Europe: The Czech Republic, Hungary, Poland and Slovakia. All four are committed to joining the European Union. Accordingly, their macroeconomic policies need to put them on a credible path towards meeting the entry criteria at some point in the foreseeable future.We develop a framework for analysing and evaluating both macroeconomic policy and the development of policy-making institutions to put each of the four national economies on that path and keep them there as they move towards accession. We also seek to design this framework so that it is more generally useful in analysing developments in the other transition economies. The approach we take to the analysis of macroeconomic policy is to look first for signs of external balance, and then to look to internal balance as the economy is increasingly decontrolled. Signs of internal imbalance, either excessive budget deficits or unacceptably high inflation, are taken as indicators that a currently satisfactory external situation could become unsatisfactory in the future, as the internal imbalance spills over to the external sector.We recommend that, in their approach to external balance, the economies adopt a Pre-Pegging Exchange Rate Regime, which essentially means no active nominal devaluation (no nominal devaluation aimed at real devaluation) as the country converges towards Union membership. We recommend that, in their approach to internal balance, countries adopt a Multi-Annual Fiscal Adjustment Strategy. Both of these policy paths are designed to bring the economies to the point of accession along as smooth a convergence path as possible. On the basis of both the development of economic institutions and performance, our overall ranking is Czech Republic, Slovakia, Poland, Hungary.