The article is the first to attempt an analysis of monetary policy transmission mechanisms in a dynamic expression. The implementation of the direct inflationary target (DIT) strategy depends crucially on whether or not any of the transmission mechanisms existing in Poland can convey monetary policy impulses.

Regrettably, the only stable transmission channel with a relatively short lag is the exchange rate channel. This channel was excluded by the Monetary Policy Council from its toolkit as the Council decided on new DIT strategy. Yet the information presented in the paper implies that Council members do try to impact the exchange rate in an informal way, through their public statements. Moreover, they do so in a manner incompatible with the requirements of the short-term inflationary target. Another observation is that there seems to exist no systematic relationship between the interest rate and the exchange rate level. Frequently expressed concern about high interest rates leading to zloty appreciation and consequently a short-term deterioration in the current account seems unjustified.

Neither is the inflationary expectations channel - so often emphasized by Council members - an effective mechanism of transmitting monetary policy stimuli. Inflationary expectations in the financial markets tend to shadow the real inflation moves - rising with increases in current inflation rate and falling when inflation slumps. Only a dramatic change in interest rate can break this relationship off, but this can prove very costly to the real economy.

The credit channel is characterized by a fairly stable shape of function of credit response to movements in interest rates. The lag, however, can amount to eighteen or more months. This channel can therefore be used to implement medium-range targets, but only to a very degree to achieve short-term targets.

The dynamic analysis of the interest rate-inflation relationship suggests that the hypothesis of the lack of causality - in the Grangerian sense - between them in a period shorter than three years should not be condemned. This is confirmed by the analysis of the response functions, which are often statistically immaterial or of the opposite sign to what the economic theory would suggest.

The findings of the paper imply that the authorities trying to "hit" the short-term CPI target are rather like a myopic hunter without his glasses on, firing away at a hare in a thick grove in the night. By a lucky coincidence, this feat may succeed. However, it is probably not the best idea to hinge a central bank's reputation on lucky coincidences.

The author thus recommends a change in the principles for short-term inflationary target determination. The target should not be specified to the tenths of a percent, the band should be extended to two percent, and a less ambitious but more credible disinflation path should be staked out for the period up to 2003.