Actual monetary policy independence in a small open economy: the Polish perspective

Abstract

The aim of this article is to examine the actual degree of monetary policy independence in a small open economy with floating exchange rate that is integrated with the world economy. It is frequently argued that for such a country the primary cost of participation in a currency area is the loss of monetary policy independence. The article raises the question if the proposition of monetary independence provided by floating exchange rate applies to a small open economy, operating within highly liberalised capital flows and highly integrated financial markets. We examine the actual degree of monetary policy independence in Poland using a vector error correction mechanism model and the data for the years 2001-2014. We obtain evidence pointing to the lack of such independence, and we show that this result is robust to extensive changes in specification, including impulse saturation. Keywords Small open economy · Monetary policy independence · Monetary union · Poland JEL Classification

Impossible Trinity in a Small Open Economy: A State–Space Model Simulation

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