Experience of emerging economies shows that liberalization of capital account transactions accompanied by macroeconomic stabilization, economic growth and continuous progress of market reforms result in an increased foreign capital inflow, including short-term portfolio investment. Cross-border capital flows complicate macroeconomic, and in particular monetary policy. Classical mechanism to exercise influence on monetary variables through such instruments as interest rate, required reserve ratio or exchange rate, is subject to disturbances under such conditions. This may make the achievement of the monetary policy disinflationary objective difficult.

This articles attempts to analyze the impact of the foreign capital on Poland's monetary policy. The analysis starts with a brief presentation of the monetary policy objectives and instruments, and statistical illustration of the foreign capital inflow into the Polish economy. Then it attempts to formulate statistical interrelations between capital inflow, money supply and inflation. The relations are then estimated based on 1995-1998 findings. Most important finding of the comparative statistics analysis suggests that in the context of an open capital account and fixed exchange rate, an increase in interest rates may result in a growth rather and not decrease of inflation.