Monetary Policy and Liberalisation in Poland, Russia and the United Kingdom

Summary

In this paper we present new empirical work to examine whether monetary aggregates can serve a useful role as intermediate targets for reducing inflation in two transitional countries — Poland and Russia. Partly because few data are yet available for such economies, we compare this with the UK’s experience over the past quarter-century which — in admittedly different circumstances — has witnessed marked financial liberalisation and where a succession of intermediate targets, including the exchange rate, has been used.

In successful transitional economies, including Poland, fixed exchange rate regimes have come under strain from capital inflows. A possible alternative for central banks is to allow greater exchange rate flexibility and to pursue their domestic policy objectives using monetary targets. In Russia and Poland, there is evidence that monetary aggregates have been a useful guide to future inflation. The lags appear to be shorter than in western economies where inflation rates are lower. But we find evidence that money velocities became less predictable as inflation fell in 1993–94.

Such relationships are in any case subject to change as a result of competition and innovation in the financial system, so it is impossible to be confident that a particular target range for any monetary aggregate will deliver desired monetary objectives and it would be unwise for either Russia or Poland to base monetary policy on monetary targets to be adhered to rigidly and unthinkingly. Better would be to identify monitoring ranges for monetary aggregates.

The views are those of the authors and not necessarily those of the Bank of England. They thank Andrew Haldane and Jagjit Chadha for their comments on an earlier draft and Andrew Brigden for research assistance.