Estimating the Natural Rate of Interest: A SVAR Approach

For the successful conduct of monetary policy the central bank needs reliable indicators of the monetary policy stance. A recently often advocated one is the gap between the real, market and the natural rate of interest. In this article we estimate the historical time series of the natural rate of interest using a structural vector autoregressive model. This method returns plausible results and thus seems to be well designed for the estimation of the natural rate of interest. We show that the natural rate exhibits quite substantial variability over time, of comparable magnitude to the variability of the real interest rate. We also find that it is a procyclical variable. We conclude that the gap between the natural and real market interest rates can be considered a useful, although not perfect, indicator of the stance of monetary policy.natural rate of interest, SVAR, monetary policy, interest rate gap

The Information Content of the Natural Rate of Interest: The Case of Poland

In this paper, I use a structural VAR model and the Kalman filter to estimate the natural rate of interest (NRI) in Poland. I show how the NRI can yield important information for a central banker. First, estimation of the NRI can be helpful for monetary authorities, seeking to stabilize inflation after a long process of disinflation. Second, for a country trying to join a monetary union there exists an additional information content of the estimated NRI. The bigger the difference between the candidates and the Unions natural rates, the more likely the “Portuguese” scenario of a widening current account after adopting the common currency.Poland, natural rate of interest, SVAR, transition economy

Designing Poland’s Macroeconomic Strategy on the Way to the Euro Area

In this paper we discuss selected aspects of Poland’s road to the euro zone. Our attention focuses on the proper design of macroeconomic policy during the accession period. We address the issue of entering ERM II, with special attention to the choice of central parity, fluctuation bands, possible revaluation of the parity and sharing the burden of interventions with the ECB. Further we concentrate on the issue of a simultaneous fulfilment of all convergence criteria. We point at the central role of fiscal austerity in providing a save framework for fulfilling the inflation, exchange rate and, obviously, the public deficit criteria. The key role of timing is accentuated.Transition economies, ERM II, equilibrium exchange rate

Downward nominal wage rigidity in Poland

We use data on enterprise level from a survey of medium sized and big companies to test for downward nominal wage rigidity in Poland. We find relatively weak support for downward nominal wage rigidity when average total compensation in the enterprise is taken into account. However, since this result may be affected by job rotation, we propose a method for eliminating its impact and find that downward wage rigidity becomes higher. Moreover, disaggregating the data reveals strong differences between sectors, with no rigidity in highly competitive branches and significant rigidities in monopolized or state-owned sectors. Still, the amount of downward nominal wage rigidity seems lower than in other countries, although, due to differences in data sets, robust comparisons are not possible.Downward nominal wage rigidity; Poland; inflation

Credit Crunch in a Small Open Economy

We construct an open-economy DSGE model with a banking sector to analyse the impact of the recent credit crunch on a small open economy. In our model the banking sector operates under monopolistic competition, collects deposits and grants collateralized loans. Collateral effects amplify monetary policy actions, interest rate stickiness dampens the transmission of interest rates, and financial shocks generate non-negligible real and nominal effects. As an application we estimate the model for Poland - a typical small open economy. According to the results, financial shocks had a substantial, though not overwhelming, impact on the Polish economy during the 2008/09 crisis, lowering GDP by a little over one percent.credit crunch, monetary policy, DSGE with banking sector

The Relativity Theory Revisited: Is Publishing Interest Rate Forecasts Really so Valuable?

In a New Keynesian model with asymmetric information we show that publication of macroeconomic projections and of the future interest rate path by the central bank can improve macroeconomic outcomes. However, the gains from publishing interest rate paths are small relative to those from publishing macroeconomic projections. Given that most inflation targeting central banks are already publishing macroeconomic projections this means that most gains from increasing transparency in this area may already have been reaped. This, together with the potential costs, may explain the relative reluctance of central banks to publish interest rate paths.interest rate path, monetary policy, adaptive learning

Lending booms in the new EU Member States: will euro adoption matter?

The paper analyses the potential for lending booms in the three biggest new EU Member States (the Czech Republic, Hungary and Poland) during the process of euro adoption. Experiences of some old members (Greece, Ireland and Portugal) and the econometric evidence speak in favour of strong loan increases in Hungary and Poland even though their magnitude may be smaller than in the case of those recently recorded in Ireland and Portugal. Due to estimation problems, the situation in the Czech Republic was more difficult to foresee, but given almost complete interest rate convergence with the euro area only modest increases in lending should be expected there. In conclusion, it may be stated that, given the currently available information, no substantial risk to the banking sectors of the new Member States should be expected. JEL Classification: E51, E58, G21banking sector stability, euro area, lending booms, new Member States

Designing Poland's Macroeconomic Strategy on the Way to the Euro Area

In this paper we discuss selected aspects of Poland's road to the euro zone. Our attention focuses on the proper design of macroeconomic policy during the accession period. We address the issue of entering ERM II, with special attention to the choice of central parity, fluctuation bands, possible revaluation of the parity and sharing the burden of interventions with the ECB.Further we concentrate on the issue of a simultaneous fulfilment of all convergence criteria. We point at the central role of fiscal austerity in providing a save framework for fulfilling the inflation, exchange rate and, obviously, the public deficit criteria. The key role of timing is accentuated.EMU; Euro; Poland

Exchange Rate Regimes and Poland's Participation in ERM II

In this paper we address some of the issues resulting from Poland's will to join the Economic and Monetary Union. Our attention focuses on topics related to the possibly soon entry into the European exchange rate mechanism (ERM II). We consider the possible paths of entering the system, providing a detailed analysis of the choice of fluctuation margins and the central parity. Further, we analyze the possible monetary policy strategies within the system. We describe the benefits and drawbacks of ERM II participation and consider the eventuality of parity revaluation. In this part estimates of the Balassa-Samuelson effect for Poland are provided.Transition economies, Poland, ERM II, Balassa-Samuelson effect, equilibrium exchange rate

Lending booms in the new EU Member States: will euro adoption matter?

The paper analyses the potential for lending booms in the three biggest new EU Member States (the Czech Republic, Hungary and Poland) during the process of euro adoption. Experiences of some old members (Greece, Ireland and Portugal) and the econometric evidence speak in favour of strong loan increases in Hungary and Poland even though their magnitude may be smaller than in the case of those recently recorded in Ireland and Portugal. Due to estimation problems, the situation in the Czech Republic was more difficult to foresee, but given almost complete interest rate convergence with the euro area only modest increases in lending should be expected there. In conclusion, it may be stated that, given the currently available information, no substantial risk to the banking sectors of the new Member States should be expected