Strict vs Flexible Inflation Targeting in the Optimal Monetary Policy Model for Poland

Abstract

In this paper, we use the model of Polish economy to examine the two most common strategies of the optimal monetary policy. In the first strategy it is assumed that the central bank implements a strategy of strict inflation targeting, according to the second strategy bank follows a flexible inflation targeting by using both: the inflation targeting and stabilizing the real economy. For both optimal strategies and for the empirical VAR model in finite decision-making horizons the optimal trajectories and impulse reaction functions are determined. Moreover it is examined how the decision-making horizon influences the optimal decisions.