Jacek Kotłowski

Does domestic output gap matter for inflation in a small open economy

In the paper we have investigated to what extent the behaviour of CPI inflation depends on changes in domestic economic activity in Polish economy which is usually described as a small open economy. We conducted a disaggregated analysis using price indices at the COICOP 4-digit level. We specified a small open economy Phillips curve for individual price indices. Additionally we investigated the exchange rate pass through at COICOP group levels. We found that more than 50 per cent of the categories react to the output gap. According to our expectations the categories which are mostly linked to the output gap are services but also non-durable goods. We identified that only small share of prices of durable and semi-durable goods react to domestic demand which can be explained to some extent by globalization process. We also found that more than one third of the price indices respond to exchange rate movements and/or foreign inflation. The impact of exchange rate is most substantial for durable and semi-durable goods which are to large extent perceived as tradable goods. Finally we aggregated the price indices for items sensitive to domestic economic activity and formed an index which, taking into account uncertainty and substantial lags in calculating output gap, may be used as an alternative measure of domestic inflationary pressure.

Reaction functions of the Polish central bankers. A logit approach

Paper presents the analysis of individual reactions functions of Polish Monetary Policy Council (MPC) members in the years 2004–2005. In the period under study the Polish central bank (National Bank of Poland) used the bias in the monetary policy as an indicator of future interest rate movements and a change of bias without a change in the short-term interest rate resulted in shifts of the yield curve comparable to those which accompanied changes in the short-term interest rate. For that reason as a monetary policy instrument in the reaction functions we use a qualitative variable, which expresses the direction of change in the restrictiveness of the monetary policy proposed by the given member of the MPC (the change of bias and/or change of central bank short-term interest rate). Taking into account the qualitative nature of the dependent variable, we employ the ordered logit model, where several variants of the reaction functions are tested. The results of the research indicate that the majority of the Polish MPC members acted forward looking rather then backward looking. The classical Taylor’s backward looking reaction function has been rejected by the data for most MPC members. Moreover the substitution of the lagged inflation by the future inflation improved the quality of the all considered models. On the other hand in the forward looking reaction function with the inflation expectations formulated for 12 months ahead the variable expressing the expectations has been significant in 6 out of 7 individual functions. The research has been completed by the sensitivity analysis of the behaviour of the MPC members against changes in the current and future inflation and changes in the output gap.

How Forward Looking are Central Banks? Some Evidence from Their Forecasts

We estimate forward-looking Taylor rules on data from macroeconomic forecasts of three central banks (Bank of England, National Bank of Poland and Swiss National Bank) in order to determine the extent to which these banks are forward looking in their monetary policy decisions. We find that all three banks are to some extent forward-looking, however to a varying degree. With respect to inflation, the NBP and the SNB look far into the future, while the BoE seems to concentrate on current inflation. As to output, the BoE and the SNB take into account its future or current value while for the NBP this variable is insignificant. We also find that central banks prefer to concentrate on one particular horizon rather than take into account the whole forecast.

Do Central Bank Forecasts Matter for Professional Forecasters

This paper examines to what extent public information provided by the central bank affects the forecasts formulated by professional forecasters. We investigate empirically whether disclosing GDP and inflation forecasts by Narodowy Bank Polski (the central bank of Poland) reduces the disagreement in professional forecasters’ expectations. The results only partially support the hypothesis on the coordinating role of the central bank existing in the literature. The main finding is that by publishing its projection of future GDP growth, the central bank reduces the dispersion of one-year-ahead GDP forecasts. Moreover our study indicates that the role of the central bank in reducing the forecasts dispersion is strengthening over time. We also find using non-linear STR models that the extent to which the projection release affects the dispersion of GDP forecasts varies over the business cycle. By disclosing its own projection the central bank reduces the disagreement among the forecasters the most in the periods when the economy moves from one phase of the business cycle to another. On the contrary, the release of CPI projection by NBP affects neither the cross-sectional dispersion nor the level of forecasts formulated by professional forecasters.

Can Interest Rate Spreads Stabilize the Euro Area

Since the creation of the euro area significant interest rate spreads have arisen between euro area countries, both for public and private debt. We check whether these spreads could be made to work towards the goal of providing more stability to the euro area. In particular we focus on reducing the imbalances that arose between the core and peripheral members of the euro area in the first decade of its existence. The idea is that stable positive spreads in peripheral countries could have decreased domestic demand, preventing the boom-bust cycles that plagued these economies. They could also prevent such developments in the future. We find that spreads on real interest rates of 0.6 to 5.5 percentage points would have been necessary to stabilize external positions of the four peripheral euro area member countries.