Monetary policy transmission mechanism in Poland What do we know in 2013?

For a central bank knowledge of the monetary policy transmission mechanism is a prerequisite for achieving its final goal, i.e. price stability. Therefore, this area of analyses and research is of key importance for central banks, including Narodowy Bank Polski (NBP). Every two years since 2011, the Research Bureau of the Economic Institute at NBP, prepares a report on the functioning of the transmission mechanism in Poland. Our aim is to gather the results of the most recent studies and to present them in a non-technical manner. Though we remain within the New-Keynesian school, we treat the theoretical achievements – according to Mayer’s (1996) terminology – rather in terms of empirical-science theory than formalistic theory. Therefore, the studies presented in this report share a common empirical character and aim at finding the most complete answer to the question on the role of monetary policy for the main economic variables in Poland. In our analyses we employ a broad set of various modelling tools. Thus, following monetary transmission literature, we use structural vector autoregression models (SVAR) as they are an important tool of inference on stylized facts, main transmission channels and their effectiveness. To examine the strength and delays in the transmission mechanism and ways in which the central bank affects the economy, we use classic structural models, i.e. the new version of the structural monetary transmission model (MMT 2.0) and the model based on the Global Projection Models, adjusted for specific features of the Polish economy, called QMOTR. In contrast to the previously used models, the new ones explicitly treat equilibria of the main macroeconomic categories and allow for a higher degree of forward-lookingness. To assess the impact of the exchange rate on the real sector, we use another structural model, i.e. the natural exchange rate model, NATREX. Finally, to analyse interest rate pass-through we apply error correction models (ECM). As in the previous report (Demchuk et al., 2012), presentation of model results is preceded by an assessment of the structural features of the Polish economy, which are potentially important for the functioning of the monetary policy transmission.