Monetary policy transmission mechanism in Poland What do we know in 2019?

The monetary policy of Narodowy Bank Polski (NBP)—pursued in accordance with the assumptions of the inflation targeting strategy—remains conventional. The Polish central bank has the capacity to change the basic monetary policy instrument, i.e. the short-term interest rate, in both directions. Therefore, the aim of this report—similarly to its previous editions— is to analyse the transmission mechanism of the conventional monetary policy.1 However, this does not mean that the analysis of the monetary policy transmission mechanism faces no limitations. The main problem constraining modelling in this area is related to the lack of variability of the NBP reference rate, very low volatility of monetary policy shocks identified with various methods, full predictability of monetary policy decisions in recent years and wellestablished expectations of private sector concerning stability of the NBP reference rate in the near future. Under these circumstances, drawing conclusions on the strength and delays of the mechanism through which potential changes in the short-term interest rate would affect the economy is more difficult and more uncertain than before. Thus, the hypothesis seems likely that economic agents used to stable interest rates and expecting their maintenance at the current level, can respond to potential changes in monetary policy parameters in another way than in the past. This is illustrated by the high uncertainty of the current response functions of various variables to monetary policy shocks, obtained from models with time-varying parameters. For the above reasons, our view of the monetary policy transmission mechanism in Poland is multi-faceted in this report. Although we show the results of standard models estimated on long samples, we attach greater importance to models with time-varying coefficients and we extend studies of the transmission mechanism at the microeconomic level, taking into account the heterogeneity of entities and their response to monetary policy decisions. In addition, we analyse the importance of various forms of central bank communication, including the text content (tone) of decision-makers’ documents, enabling the central bank to influence the expectations of private sector entities even if short-term interest rates do not change.