Implications of ERM2 for Poland’s Monetary Policy

Lucjan Orlowski and Krzysztof Rybinski

No wp802, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

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 (search for similar items in EconPapers)
JEL-codes: E58 E61 F33 P24 (search for similar items in EconPapers)
Pages: pages
Date: 2005-12-01
New Economics Papers: this item is included in nep-cba, nep-eec, nep-fmk, nep-ifn, nep-mac, nep-mon and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Implications of ERM2 for Poland's monetary policy (2006)
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