Poland’s policy mix: fiscal or monetary leadership?

The way in which monetary and fiscal policy interact has an impact on the policy mix. A standard finding in the economic literature on strategic interactions between the fiscal and monetary authorities is that lack of cooperation can lead to a suboptimal policy mix. This is in particular the outcome of a Stackelberg game between the two policy-makers, with the government as the leader and the monetary authority as the follower, which appears to be a realistic description of the current institutional arrangements in Poland. This Country Focus examines whether these theoretical considerations are relevant to developments in fiscal and monetary policy in Poland since 1999. The suboptimal policy mix that characterises much of the period under review can be interpreted in part as the outcome of non-cooperative behaviour as predicted by the leader follower model. Clearly, lack of fiscal consolidation and persistent uncertainties about fiscal policy have weighed heavily on monetary policy decisions. However, shifts in the monetary stance also reflect the National Bank of Poland's reaction to changing economic conditions from which its response to changes in fiscal policy alone is difficult to disentangle.

Poland's recent experience suggests that a credible commitment to fiscal discipline and greater predictability of fiscal plans would help improve the policy mix.