The Polish Exchange Rate System : A Cointegration Analysis

In October 1991 Poland has established a preannounced crawling peg regime in which the zloty is tied to a currency basket and devalued with a preannounced monthly rate (rate of crawl). If the monetary authorities have been successful in defending the crawling peg stable long-run relationships between the Polish zloty on the one hand and the basket’s value and the currencies comprising the basket on the other hand are expected to exist. I test for such long-run relationships within the cointegration framework. Analyzing both the first part of the crawling peg regime that was characterized by several discrete step devaluations and the period after the introduction of the euro in January 1999 I find the postulated cointegration relations and conclude that the monetary authorities could defend the crawling peg for the sample periods under study. However, for the period after the launch of the free floating system in April 2000, the stable long-run relationships derived from the crawling peg system have not been supported by the foreign exchange market. ∗I would like to thank Helmut Lütkepohl, Anja Schulz, and Ralf Brüggemann for many helpful comments and suggestions. Moreover, I am grateful to the Deutsche Forschungsgemeinschaft, SFB 373, for financial support.