The Polish exchange rate system: A unit root and cointegration analysis

In October 1991 Poland has established a crawling peg regime in which the zloty is tied to a currency basket and devalued with a monthly rate of crawl. If the monetary authorities are successful in defending the crawling peg the basket rate measured in Polish zloty is supposed to be stationary. Furthermore, a stable long-run relationship between the zloty-U.S. dollar rate and the basket's value expressed in U.S. dollar is expected to exist. The results of the unit root and cointegration analysis indicate that the monetary authorities have been able to defend the crawling peg for the sample periods under study, although it seems that not all requirements of the exchange rate regime have been met. The foreign exchange markets, however, have not supported the relationships derived from the crawling peg system after the introduction of the free floating system in April 2000.The final version of this paper has been prepared while I was a Jean Monnet Fellow at the European University Institute. I would like to thank the EUI for the award of the Fellowship and its hospitality. Moreover, I am grateful to Helmut Lütkepohl, Anja Schulz, Ralf Brüggemann, and two anonymous referees for many helpful comments and suggestions. I also thank the Deutsche Forschungsgemeinschaft, SFB 373, for financial support.