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Implications of ERM2 for Poland’s Monetary Policy

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  • Lucjan Orlowski

    ()

  • Krzyzstof Rybinski

    ()

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).

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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number wp802.

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Length: pages
Date of creation: 01 Dec 2005
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Handle: RePEc:wdi:papers:2005-802

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Keywords: inflation targeting; monetary convergence; ERM2; euro; Poland; cointegration; GARCH;

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References

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Citations

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Cited by:
  1. Lucjan T. Orlowski, 2008. "Monetary Policy Rules for Convergence to the Euro," CASE Network Studies and Analyses, CASE-Center for Social and Economic Research 0358, CASE-Center for Social and Economic Research.
  2. Marko Malovic & Malisa Djukic & Srdjan Redzepagic, 2011. "Maastricht Criteria at the Age of 18: Are They Converging, Which Party and to What End?," Book Chapters, Institute of Economic Sciences.
  3. Sahar Bahmani & Ali Kutan, 2010. "How stable is the demand for money in emerging economies?," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 42(26), pages 3307-3318.
  4. Kocenda, Evzen & Valachy, Juraj, 2006. "Exchange rate volatility and regime change: A Visegrad comparison," Journal of Comparative Economics, Elsevier, vol. 34(4), pages 727-753, December.
  5. Mikek, Peter, 2008. "Alternative monetary policies and fiscal regime in new EU members," Economic Systems, Elsevier, Elsevier, vol. 32(4), pages 335-353, December.

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