ABSTRACT: This paper applies an empirical framework, combining the use of ordered probit approach, novel real-time data set and decision-making meetings of monetary authority as a unit of observation, to estimate highly systematic reaction patterns between policy interest rate decisions and incoming economic data. The study proposes a methodology to measure the empirical significance of the discrete nature of the dependent variable by assessing formally the statistical effects of using the conventional regression models for continuous dependent variables instead of the discrete-choice models. The paper demonstrates that both the discrete-choice approach and real-time policy-meeting data do matter in the econometric identification of monetary policy in Poland. The study detects structural breaks in policy, which switched its focus from current to expected inflation and from exchange rate to real activity. The response to inflationary expectation is shown to be highly asymmetrical depending on whether the expectation is above or below the inflation target. The policy rate appears to be driven by key economic indicators without evidence for intentional interest-rate smoothing by central bank. The estimated rules explain correctly 95 percent of observed policy actions and surpass the market anticipation, made one day prior to a policy meeting, both in and out of sample.
Andrei Sirchenko,
Jul 29, 2015, 2:58 AM