Construction and Assessment of a Mixed Exchange Policy Indicator: Explanation of Polish Inflation

The impact of exchange policy on macroeconomic targets (growth, inflation…) is rather difficult to assess empirically. There is a lack of accurate quantitative tools to define the strategy used, then a dummy variable (fixed or floating rate) is generally used in econometric studies. This paper tries to provide an indicator to measure the trade-off between nominal anchor and real target strategies in open economies. Unlike traditional dummies, it allows a mixed strategy (generally observed) in the managing of the exchange rate, according to external and internal constraints. The analysis of Poland's exchange policy since 1990 shows this trade-off, since monetary authorities have softened their nominal anchor policy to avoid excessive real appreciation. An econometric estimation of Polish inflation is used to test the validity of the indicator suggested. The results confirm not only the classical determinants of inflation, but also the validity of our mixed exchange policy indicator.Indicator, Exchange policy, Poland