Monetary Policy Case Study

Case Title:

Economic Reforms in Poland: A Case of Inflation Targeting

Abstract:
Poland joined the European Union (EU) in May 2004, together with 9 other European countries. The accession to the European Union was the first step in the economic integration of the countries into Europe, inclusion to the European Monetary Union (EMU) being the final target. The countries would have to replace their currencies with the Euro within a reasonable time-frame. For inclusion in the EMU, the countries would have to fulfill certain criteria, collectively known as the Maastricht Criteria. One of the criteria was that the countries had to bring down annual inflation rate to within 1.5% of the average of three EU countries with the lowest inflation rates. After remaining a command economy under Communist rule from 1945 to 1989, Poland liberalized its economy with the help of the Balcerowicz Plan in 1989. The plan, though largely successful in bringing down inflation to moderate levels (from 70.3% in 1991 to 11.8% in 1998), could not reduce inflation to the levels required for Poland’s accession into the EMU. In 1998, Poland adopted ‘Inflation Targeting’, a mix of monetary and fiscal policies aimed primarily at bringing down inflation to the Maastricht levels. Though such policies were followed by many countries during that period, including Hungary and Czech Republic, Poland was one of the few countries to successfully implement this policy. It currently has one of the lowest inflation rates in the EU (the average inflation rate in Poland between 2001 and 2005 was 2.8%). This case investigates the monetary-fiscal policy mix that enabled Poland to succeed where many others failed. It also analyses the long-term effects of the reforms plan and whether it would help Poland achieve its final goal – the accession to the EMU.

Pedagogical Objectives:

• To understand the importance of fiscal prudence in shaping an effective monetary policy
• To analyse the pros and cons of inflation targeting monetary policy.

Keywords : Poland, Economics, Macroeconomic, Inflation, Reform, Targeting, Stagflation, Interest rate, Exchange rate, Fiscal deficit, European Union (EU), European Monetary Union (EMU), Euro, Monetary Policy Case Study, Transition economy, Policy