Sensitivity of Interest Rates to Inflation and Exchange Rate in Poland: Implications for Direct Inflation Targeting

Symposium Article
  • 12 Downloads

Abstract

This study examines sensitivity of short-term interest rates to inflation and exchange rate in Poland over the past two decades. It aims to ascertain a relative role of inflation and exchange rate stability objectives for monetary policy. A model of short-term interbank interest rates as a function of CPI inflation and the nominal effective exchange rate is proposed and tested for stability, structural breaks and regime shifts. The Bai–Perron multiple breakpoint and two-state Markov regime switching tests are employed on monthly data for January 1994–December 2016 period. The tests point to a major structural break and to a regime change in the beginning of 2002. Its timing reflects the de facto inflation targeting becoming an effective and credible policy. The findings further suggest that the inflation targeting helped mitigate potential contagion effects of the 2008–2010 financial crisis.

Keywords

direct inflation targeting de facto inflation targeting nominal effective exchange rate convergence to the euro Bai–Perron multiple breakpoint Markov regime switching 

JEL Classifications

E42 E43 P24 

References

  1. Bai, J and Perron, P. 2003: Computation and analysis of multiple structural change models. Journal of Applied Econometrics 18(1): 1–22.CrossRefGoogle Scholar
  2. Ball, L. 1999: Policy rules for open economies. In: Taylor, J. (ed). Monetary policy rules. University of Chicago Press: Chicago, IL, pp. 127–156.Google Scholar
  3. Bernanke, BS, Laubach, T, Mishkin, FS and Posen, AS. 1999: Inflation targeting: Lessons from the international experience. Princeton University Press: Princeton.Google Scholar
  4. Borowski, J, Brzoza-Brzezina, M and Szpunar, P. 2003: Exchange rate regimes and Poland’s participation in ERM II. Bank i Kredyt 34(1): 18–27.Google Scholar
  5. Clarida, R, Gertler, M and Galí, J. 1998: Monetary policy rules in practice: Some international evidence. European Economic Review 42(6): 1033–1067.CrossRefGoogle Scholar
  6. Clarida, R, Gertler, M and Galí, J. 2000: Monetary policy rules and macroeconomic stability: Theory and some evidence. Quarterly Journal of Economics 115(1): 147–180.CrossRefGoogle Scholar
  7. Cheikh, NB and Louhichi, W. 2015: Pass-through of exchange rate shocks to prices in euro area: Evidence from pricing chain model. In: Barnett, WA. (ed). Monetary policy in the context of the financial crisis: New challenges and lessons. Emerald Press, pp. 113–162.Google Scholar
  8. Ebeke, C and Azangue, AF. 2015: Inflation targeting and exchange rate regimes in emerging markets. International Monetary Fund: Working Paper 15/228.Google Scholar
  9. Égert, B and Kočenda, E. 2014: The impact of macro news and central bank communication on emerging European forex markets. Economic Systems 38(1): 73–88.CrossRefGoogle Scholar
  10. Feldkircher, M, Huber, F and Moder, I. 2016: Modeling the evolution of monetary policy rules in CESEE. Oesterreichische Nationalbank – Focus on European Economic Integration Q1.Google Scholar
  11. Fernandez, A and Nikolsko-Rzhevskyy, A. 2007: Measuring the Taylor rule’s performance. Federal Reserve Bank of Dallas Economic Letter 2(6).Google Scholar
  12. Fischer, S and Sahay, R. 2001: The transition economies after ten years. In: Orlowski, LT. (ed). Transition and growth in post-communist countries: The ten-year experience. E. Elgar Publ. Co., pp. 3–47.Google Scholar
  13. Frömmel, M, Garabedian, G and Schobert, F. 2011: Monetary policy rules in Central and Eastern European countries: Does the exchange rate matter? Journal of Macroeconomics 33(4): 807–818.CrossRefGoogle Scholar
  14. Gürkaynak, RS, Sack, B and Swanson, ET. 2007: Market-based measures of monetary policy expectations. Journal of Business and Economic Statistics 25(2): 201–212.CrossRefGoogle Scholar
  15. Gürkaynak, RS, Sack, B and Wright, JH. 2010: The TIPS yield curve and inflation compensation. American Economic Journal/Macroeconomics 29(1): 70–92.Google Scholar
  16. Jonas, J and Mishkin, FS. 2005: Inflation targeting in transition economies: Experience and prospects. In: Bernanke, BS and Woodford, M. (eds). The inflation-targeting debate. University of Chicago Press, pp. 353–413.Google Scholar
  17. Kapuściński, M, Kocięcki, A, Kowalczyk, H, Łyziak, T, Przystupa, J, Stanisławska, E, Sznajderska, A and Wróbel, E. 2016: Monetary policy transmission mechanism in Poland: What do we know in 2015? National Bank of Poland Working Paper no. 249.Google Scholar
  18. Koenig, EF. 2006: Through a glass, darkly: How data revisions complicate monetary policy. Federal Reserve Bank of Dallas Economic Letter No. 1/2006.Google Scholar
  19. Kuttner, KN. 2004: The role of policy rules in inflation targeting. Federal Reserve Bank of St. Louis Review 86(4): 89–111.Google Scholar
  20. Mackiewicz-Łyziak, J. 2016: Active and passive monetary policy in CEE countries with inflation targeting: The case of the Czech Republic, Hungary and Poland. Eastern European Economics 54(2): 133–152.CrossRefGoogle Scholar
  21. Orlowski, LT. 2008a: Advancing inflation targeting in Central Europe: Strategies, policy rules and empirical evidence. Comparative Economic Studies 50(3): 438–459.CrossRefGoogle Scholar
  22. Orlowski, LT. 2008b: Relative inflation-forecast as monetary policy target for convergence to the euro. Journal of Policy Modeling 30(6): 1061–1081.CrossRefGoogle Scholar
  23. Orlowski, LT. 2010: Monetary policy rules for convergence to the euro. Economic Systems 34(2): 148–159.CrossRefGoogle Scholar
  24. Orlowski, LT. 2016: Co-movements of non-euro EU currencies with the euro. International Review of Economics and Finance 45: 376–383.CrossRefGoogle Scholar
  25. Polański, Z. 2004: Poland and the European Union: The monetary policy dimension. Monetary Policy before Poland’s Accession to the European Union. Bank i Kredyt 35(5): 4–18.Google Scholar
  26. Potjagailo, G. 2016: Spillover effects from euro area monetary policy across the EU: A factor-augmented VAR approach. Kiel Institute for the World Economy Working Paper No. 2033.Google Scholar
  27. Roger, S. 2009: Inflation targeting at 20: Achievements and challenges. International Monetary Fund: Working Paper 09/236.Google Scholar
  28. Siklos, PL. 2015: Macroeconomic implication of financial frictions in the euro zone. Comparative Economic Studies 57(2): 222–242.CrossRefGoogle Scholar
  29. Svensson, LEO. 2000: Open-economy inflation targeting. Journal of International Economics 50(2): 155–183.CrossRefGoogle Scholar
  30. Sznajderska, A. 2014: Asymmetric effects in the Polish monetary policy rule. Economic Modelling 36(1): 547–556.CrossRefGoogle Scholar

Copyright information

© Association for Comparative Economic Studies 2017

Authors and Affiliations

  1. 1.Sacred Heart UniversityFairfieldUSA

Personalised recommendations