Ex ante Dynamics of Real Effects of Monetary Policy: Theory and Evidence for Poland and Russia, 2001–2003

Abstract

This paper proposes a new indicator of the expected real effects of an inflation-targeting monetary policy. This indicator can be derived from a simple two-dimensional vector autoregressive model of inflation and the output gap. A simulation experiment illustrates its rationale for timing monetary decisions, if the control of output is a secondary policy target. Applied for Poland, this might have contributed to a policy that would have reduced Polish inflation in 2003 and increased output growth in 2004. We also show how this indicator can be applied for Russia