Competitiveness Channel in Poland and Slovakia: A Pre-EMU DSGE Analysis

National Bank of Poland Working Paper No. 86

52 Pages Posted: 21 Jul 2011 Last revised: 8 Jul 2016

See all articles by Andrzej Torój

Andrzej Torój

National Bank of Poland; Warsaw School of Economics (SGH) - Institute of Econometrics

Date Written: July 21, 2011

Abstract

Once a country joins a monetary union, an efficient competitiveness channel is considered to be the main substitute for the abandoned autonomous monetary and exchange rate policy. This paper attempts to make an empirical assessment of how the price competitiveness of domestic producers stabilizes the Polish and Slovak economies against the background of potentially procyclical real interest rates in EMU. To address this issue, we use a small open economy DSGE model. We compare the FIML estimates and resulting IRFs for Poland and Slovakia, concluding that the latter country seems in general to be more capable of handling asymmetric shocks under the common monetary policy. Also, if there was a natural interest rate disparity of 1 percentage point in favour of a catching-up economy and agents expected a 30-year long period of closing this gap, our model would predict a terms of trade appreciation for both countries in question, whereby the required appreciation would be more pronounced for Poland than for Slovakia (5.1% and 3.4% respectively). In the context of Slovak revaluations in ERM II, this could be taken into consideration when setting the final conversion rate, along with its further pros and cons.

Keywords: competitiveness channel, EMU, MCI-ratio, DSGE, forward-looking estimation

JEL Classification: C22, C32, F15, F41

Suggested Citation

Toroj, Andrzej, Competitiveness Channel in Poland and Slovakia: A Pre-EMU DSGE Analysis (July 21, 2011). National Bank of Poland Working Paper No. 86, Available at SSRN: https://ssrn.com/abstract=1891832 or http://dx.doi.org/10.2139/ssrn.1891832

Andrzej Toroj (Contact Author)

National Bank of Poland ( email )

00-919 Warsaw
Poland

Warsaw School of Economics (SGH) - Institute of Econometrics ( email )

Niepodleglosci 164
Warsaw, 02-554
Poland

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