CASE Belarus issued a new working paper on “Monetary policy and the global financial crisis in a small open economy“.
The given research focuses on the basic cost of joining the currency union, i.e. the loss of the autonomous monetary policy. The main objective of this research is to give a quantitative answer to the question what would happen during the Global Financial Crisis of 2008-2009 and in the following years, if Poland had kept a fixed exchange rate. Economic integration between countries with a heterogeneous structure of the economy into a common monetary union may increase their exposure to asymmetric shocks. This is particularly visible during economic crises. A standard New Keynesian DSGE model of a small open economy, extended to include a government sector, is used to investigate the Global Financial Crisis in Poland. The model suggests that if policymakers in Poland had adopted a fixed exchange rate instead of flexible exchange rate under Taylor Rule, then the output fluctuations in 2008-2009 would have been much higher. In other words, independent monetary policy conducted by the National Bank of Poland contributed to moderation of shocks by ca. 25% in 2008 and ca. 15% in 2009.
The paper is the result of the conference organised by CASE Belarus in August 2020. After gathering feedback the paper might be developed.