Economic and monetary policy in Eastern Europe: monetarist or Keynesian approach?

Abstract

Practically all economists agree that a rational monetary policy is an unavoidable presupposition for the transformation of Eastern Europe’s centrally planned economies into a market economy. Only such a policy is able to create the necessary macroeconomic environment for such a transformation. Economists also agree that during the transformation period inflationary tendencies should be minimized (although it is clear that some inflationary impulses caused by the liberalization of prices in these countries are unavoidable). This fact requires a rather restrictive monetary policy in the transition period. The degree of this restriction, however, is a very zealously discussed topic where we are faced with the well-known discussion between monetarists and Keynesians (or Neo-keynesians) which has reached practically all Eastern European countries. The crucial point of this discussion is the dilemma between monetary stability and economic growth. While monetarists stress the absolute preference of monetary stability, i.e. struggle against inflation, Keynesians are willing to accept a certain degree of inflation as a presupposition of economic growth.

I am indebted to Vlasta Rakociova for her help in preparing the graphical form of this paper.