At the current juncture, the global economy is facing adverse supply side shocks amid the ongoing war in Ukraine. The persistent energy crisis and a potential flare-up in bottlenecks in global value chains are expected to further fuel inflationary pressures. Against the background of escalating prices, central banks have already started increasing the key interest rates. At the same time, given the worsening economic outlook, fears of a global recession have intensified. However, recent empirical evidence shows that a tightening monetary policy is not necessarily contractionary. In this regard, the aim of this paper is to investigate the existence of a Neo-Fisher effect in Hungary, Poland and Romania. Results show that a permanent tightening of the monetary policy, identified through long run restrictions within a vector autoregressive model, is expansionary and inflationary, contrary to the common knowledge regarding the effects of a temporary increase in interest rates. Under these circumstances, the ongoing process of normalizing monetary policy is not automatically leading to a recession in selected Central and Eastern European countries. The importance of anchoring inflation expectations is also highlighted.
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