Implications of Erm2 for Poland's Monetary Policy
41 Pages Posted: 8 May 2006
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Implications of Erm2 for Poland's Monetary Policy
Implications of Erm2 for Poland's Monetary Policy
Implications of Erm2 for Poland's Monetary Policy
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: Suggested Citation
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