Macroeconomic environment of business activities - 4 Dariusz Filar

Monetary Policy The main goal of the monetary policy is achievement of price stability – that is inflation so low and stable over time that is does not materially enter into the decisions of firms and households.

Inflation targeting Inflation targeting is a monetary policy strategy in which the central bank makes a public commitment to achieving an explicit inflation target. Inflation targets differ in varous countries but a typical target range is between 1 and 4 per cent.

Monetary Policy The tightening cycle – Central Bank raises its main reference rate The easing cycle – Central Bank lowers its main reference rate

Monetary Policy Transmission (1) 1)Central Bank raises/lowers its reference rate 2)Next day other short-term interest rates rise/fall 3)Few months later supply of loanable funds decrease/increase 4)Few months later the long-term real interest rate rises/falls

Monetary Policy Transmission (2) 5) Up to a year later consumption, investment and net exports decrease/increase 6) Up to a year later aggregate demand decreases/increases 7) About a year later real GDP growth rate decreases/increases 8) About two years later inflation rate decreases/increases

Inflation target, inflation rate and reference rate in Poland