Bureau of Macroeconomic Research National Bank of Poland

The exchange rate in the monetary transmission mechanism. 1. A broadly accepted thesis in the economic literature states that in an open economy, with high mobility of capital, the only monetary policy efficient in the long run is the policy based on three pillars: [1] flexible exchange rate; [2] direct inflation targeting; [3] clearly defined monetary policy rule1. Then, exchange rates become an essential element of the monetary policy transmission mechanism allowing the arbitrage of domestic and foreign interest rates through expected changes of exchange rate. The substantial role of exchange rates in transmission mechanism has been also confirmed for Poland. Therefore we have decided to develop research works on that part of transmission. The results have been presented below. Uncovered interest rate parity model. 1. The uncovered interest rate parity model (UIP), which relates expected exchange rate de-preciation to changes in the level of domestic and foreign interest rates, seems to be a proper theoretical construction suitable both for research on transmission mechanism and for predict-ing the changes of exchange rates in the future. Suppose that the UIP, in its classic form, holds in n periods. Then: ( 1) ( ) nntnt n i titt iieeEn α+−=