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

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  • Mariusz Górajski

    (Department of Econometrics, Faculty of Economics and Sociology, University of Lodz)

  • Zbigniew Kuchta

    (Department of Economic Mechanisms, Faculty of Economics and Sociology, University of Lodz)

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.

Suggested Citation

  • Mariusz Górajski & Zbigniew Kuchta, 2022. "Which hallmarks of optimal monetary policy rules matter in Poland? A stochastic dominance approach," Bank i Kredyt, Narodowy Bank Polski, vol. 53(2), pages 149-182.
    • Handle: RePEc:nbp:nbpbik:v:53:y:2022:i:2:p:149-182
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    More about this item

    Keywords

    E47; E52; E61;
    All these keywords.

    JEL classification:

    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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