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The Monetary Transmission Mechanism in the Czech Republic (evidence from VAR analysis)

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  • Katerina Arnostova
  • Jaromir Hurnik

Abstract

Due to significant lags between a monetary policy action and the subsequent responses in the economy, understanding the transmission mechanism is of primary importance for conducting monetary policy. This paper analyses the monetary policy transmission mechanism using VAR models - the most widely used empirical methodology for analyzing the transmission mechanism in the Czech economy. Using the VAR methodology, the paper tries to evaluate the effects of an exogenous shock to monetary policy. The results show that an unexpected monetary policy tightening leads to a fall in output, whereas prices remain persistent for a certain time. The exchange rate reaction then heavily depends on the data sample used. Although it is clear that due to the rather short time span of the data, the results should be taken with caution, they at least show that the basic framework of how monetary policy affects the economy does not differ significantly either from what would be predicted by the theory or from the results obtained for more developed economies.

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Bibliographic Info

Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2005/04.

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Date of creation: Dec 2005
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Handle: RePEc:cnb:wpaper:2005/04

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Keywords: Impulse response; monetary policy; transmission mechanism; vector autoregressions.;

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References

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  1. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
  2. Peersman, Gert & Smets, Frank, 2001. "The monetary transmission mechanism in the euro area: more evidence from VAR analysis," Working Paper Series 0091, European Central Bank.
  3. Richard Clarida & Mark Gertler, 1996. "How the Bundesbank Conducts Monetary Policy," NBER Working Papers 5581, National Bureau of Economic Research, Inc.
  4. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  5. Christopher A. Sims & Tao A. Zha, 1998. "Does monetary policy generate recessions?," Working Paper 98-12, Federal Reserve Bank of Atlanta.
  6. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
  7. Mojon, Benoît & Peersman, Gert, 2001. "A VAR description of the effects of monetary policy in the individual countries of the euro area," Working Paper Series 0092, European Central Bank.
  8. F. Smets & R. Wouters, 1999. "The Exchange Rate and the Monetary Transmission Mechanism in Germany," DNB Staff Reports (discontinued) 35, Netherlands Central Bank.
  9. Uhlig, Harald, 1994. "What Macroeconomists Should Know about Unit Roots: A Bayesian Perspective," Econometric Theory, Cambridge University Press, vol. 10(3-4), pages 645-671, August.
  10. Mojon, Benoît & Kashyap, Anil K. & Angeloni, Ignazio & Terlizzese, Daniele, 2002. "Monetary Transmission in the Euro Area : Where Do We Stand?," Working Paper Series 0114, European Central Bank.
  11. Eric M. Leeper & Tao Zha, 2001. "Assessing simple policy rules: a view from a complete macroeconomic model," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 83-112.
  12. Kim, Soyoung & Roubini, Nouriel, 2000. "Exchange rate anomalies in the industrial countries: A solution with a structural VAR approach," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 561-586, June.
  13. Christopher A. Sims & Harald Uhlig, 1988. "Understanding unit rooters: a helicopter tour," Discussion Paper / Institute for Empirical Macroeconomics 4, Federal Reserve Bank of Minneapolis.
  14. Angeloni, Ignazio & Ehrmann, Michael, 2003. "Monetary policy transmission in the euro area: any changes after EMU?," Working Paper Series 0240, European Central Bank.
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Citations

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Cited by:
  1. Magdalena Morgese Borys & Roman Horváth, 2007. "The Effects of Monetary Policy in the Czech Republic: An Empirical Study," Working Papers IES 2007/26, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Oct 2007.
  2. Ivan Baboucek & Martin Jancar, 2005. "Effects of Macroeconomic Shocks to the Quality of the Aggregate Loan Portfolio," Working Papers 2005/01, Czech National Bank, Research Department.
  3. Rebeca Jimenez-Rodriguez & Amalia Morales-Zumaquero & Balazs Egert, 2010. "The VARying Effect of Foreign Shocks in Central and Eastern Europe," William Davidson Institute Working Papers Series wp989, William Davidson Institute at the University of Michigan.
  4. OROS, Cornel & ROMOCEA-TURCU, Camelia, 2009. "The Monetary Transmission Mechanisms In The Ceecs: A Structural Var Approach," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 9(2).
  5. Rania A. Al-Mashat & Andreas Billmeier, 2007. "The Monetary Transmission Mechanism in Egypt," IMF Working Papers 07/285, International Monetary Fund.
  6. Charalambos G. Tsangarides, 2010. "Monetary Policy Transmission in Mauritius Using a VAR Analysis," IMF Working Papers 10/36, International Monetary Fund.
  7. Hoffmann, Andreas, 2009. "An Overinvestment Cycle in Central and Eastern Europe?," MPRA Paper 15668, University Library of Munich, Germany.
  8. Roman Horváth, 2005. "Financial Accelerator Effects in the Balance Sheets of Czech Firms," Working Papers IES 96, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2005.
  9. Balázs �gert & Ronald MacDonald, 2009. "Monetary Transmission Mechanism In Central And Eastern Europe: Surveying The Surveyable," Journal of Economic Surveys, Wiley Blackwell, vol. 23(2), pages 277-327, 04.
  10. Coricelli, Fabrizio & Égert, Balázs & MacDonald, Ronald, 2006. "Monetary transmission mechanism in Central and Eastern Europe: Gliding on a wind of change," BOFIT Discussion Papers 8/2006, Bank of Finland, Institute for Economies in Transition.

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