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The Effects of Monetary Policy in the Czech Republic: An Empirical Study

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  • Magdalena Morgese Borys

    (CERGE-EI)

  • Roman Horvath

    (Czech National Bank and Charles University, Prague)

Abstract

In this paper, we examine the effects of Czech monetary policy on the economy within the VAR, structural VAR, and factor-augmented VAR frameworks. We document a well-functioning transmission mechanism similar to the euro area countries, especially in terms of persistence of monetary policy shocks. Subject to various sensitivity tests, we find that a contractionary monetary policy shock has a negative effect on the degree of economic activity and the price level, both with a peak response after one year or so. Regarding prices at the sectoral level, tradables adjust faster than non-tradables, which is in line with microeconomic evidence on price stickiness. There is no price puzzle, as our data come from a single monetary policy regime. There is a rationale in using the real-time output gap instead of current GDP growth, as using the former results in much more precise estimates. The results indicate a rather persistent appreciation of the domestic currency after a monetary tightening, with a gradual depreciation afterwards.This paper was presented at the 18th International Conference of the International Trade and Finance Association, meeting at Universidade Nova de Lisboa, Lisbon, Portugal, on May 23, 2008.

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Paper provided by International Trade and Finance Association in its series International Trade and Finance Association Conference Papers with number 1109.

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Date of creation: 29 Jul 2008
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Handle: RePEc:bep:itfapp:1109

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