Which hallmarks of optimal monetary policy rules matter in Poland? A stochastic dominance approach

Mariusz Górajski and Zbigniew Kuchta

Bank i Kredyt, 2022, vol. 53, issue 2, 149-182

Abstract: We employ a stochastic dominance approach to find and rank alternative optimal simple monetary rules in the rational expectations model of the Polish economy, using a new algorithm to calculate the distributions of the optimal central bank welfare loss and policy feedback parameters. We apply this framework to the Erceg, Henderson and Levin (2000) model estimated for the Polish economy using quarterly data for 1995–2021 and examine monetary policy rule hallmarks for the welfare- -loss-minimising central bank. We confirm the importance of policymakers’ interest rate smoothing incentives and introducing variables of real economic activity and wages into optimal monetary policy rules. The central bank’s choice of response variables depends on the dynamic specification of the policy rule and the interest rate smoothing mechanism. With an interest rate smoothing mechanism, the contemporaneous monetary policy rule that reacts to inflation, real wages, and the output gap, minimises the welfare loss for all decision makers admitting first-degree stochastic dominance preferences.

Keywords: E47; E52; E61 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpbik:v:53:y:2022:i:2:p:149-182

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