Implications of Erm2 for Poland's Monetary Policy

41 Pages Posted: 1 Jun 2006  

Lucjan T. Orlowski

Sacred Heart University - John F. Welch College of Business

Krzysztof Rybinski

Warsaw University

Multiple version iconThere are 3 versions of this paper

Date Written: December 2005

Abstract

This study proposes an extension to the inflation targeting framework for Poland that takes into consideration the exchange rate stability constraints imposed by the obligatory participation in the ERM2 on the path to the euro. The modified policy framework is based on targeting the differential between the domestic and the implicit euro area inflation forecasts. The exchange rate stability objective enters the central bank reaction function and is treated as an indicator variable. Adjustments of interest rates respond to changes in the relative inflation forecast, while foreign exchange market intervention is applied for the purpose of stabilizing the exchange rate. The dynamic market equilibrium exchange rate is ascertained by employing the Johanssen cointegration tests and the threshold generalized autoregressive heteroscedasticity model with the in-mean extension and generalized error distribution (TGARCH-M-GED).

Keywords: inflation targeting, monetary convergence, ERM2, euro, Poland, cointegration, GARCH

JEL Classification: E58, E61, F33, P24

Suggested Citation

Orlowski, Lucjan T. and Rybinski, Krzysztof, Implications of Erm2 for Poland's Monetary Policy (December 2005). William Davidson Institute Working Paper No. 802. Available at SSRN: https://ssrn.com/abstract=905594 or http://dx.doi.org/10.2139/ssrn.905594

Lucjan T. Orlowski (Contact Author)

Sacred Heart University - John F. Welch College of Business ( email )

5151 Park Avenue
Fairfield, CT 06825
United States
203-371-7858 (Phone)

HOME PAGE: http://www.sacredheart.edu/ltorlowski.cfm

Krzysztof Rybinski

Warsaw University ( email )

ul. Dluga 44/50
Warszawa, Pl-00681
Poland
+48 22 22 74 04 (Phone)
+48 22 22 74 05 (Fax)

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