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

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  • Magdalena Morgese Borys
  • Roman Horvath

Abstract

In this paper, we examine the effects of Czech monetary policy on the economy within VAR and the structural VAR framework. Subject to various sensitivity tests, we find that contractionary monetary policy shock has a negative effect on the degree of economic activity and price level, both with a peak response after one year or so. Regarding the prices at the sectoral level, tradables adjust faster than non-tradables, which is in line with microeconomic evidence on price persistence. 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. There is no evidence for price puzzle within the system. The results indicate a rather persistent appreciation of domestic currency after monetary tightening with a gradual depreciation afterwards.

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Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp339.

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Date of creation: Sep 2007
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Handle: RePEc:cer:papers:wp339

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Keywords: Monetary policy transmission; VAR; real-time data; sectoral prices.;

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