Advanced Search
MyIDEAS: Login to save this paper or follow this series

Adjustment capacity in a monetary union: a DSGE evaluation of Poland and Slovakia


Author Info

  • Andrzej Torój

    (Ministry of Finance, Poland)


Abstract Once a country joins a monetary union, an efficient competitiveness channel is commonly 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 in comparison to the real interest rate, that could potentially be procyclical in EMU. To address this issue, we revisit the econometric studies of weighting the Monetary Conditions Index (MCI-ratio) to explore the relative importance of the two channels. We apply the IS-curve approach and -- as opposed to previous MCI-ratio literature -- we build a small open economy DSGE framework to be estimated with classical forward-looking techniques (FIML). We compare the estimates and impulse-response functions for Poland and Slovakia, concluding that the latter country seems to be more capable of handling asymmetric demand shocks under the common monetary policy. At the same time, it remains more vulnerable to asymmetric cost-push shocks. Also, we examine the consequences of a permanent fall in the interest rates in the home economy after the accession to the monetary union. If there was a natural interest rate disparity of 1 percentage point in favour of the 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 (9.9% and 2.6% respectively).

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL:
Download Restriction: no

Bibliographic Info

Paper provided by Ministry of Finance in Poland in its series Working Papers with number 3.

as in new window
Length: 41 pages
Date of creation: 07 May 2010
Date of revision:
Handle: RePEc:fpo:wpaper:3

Contact details of provider:
Web page:
More information through EDIRC

Related research

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

Find related papers by JEL classification:


No references listed on IDEAS
You can help add them by filling out this form.



This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.


Access and download statistics


When requesting a correction, please mention this item's handle: RePEc:fpo:wpaper:3. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ministry of Finance in Poland).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.