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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. F. Smets & R. Wouters, 1999. "The Exchange Rate and the Monetary Transmission Mechanism in Germany," DNB Staff Reports (discontinued) 35, Netherlands Central Bank.
  2. Sims, Christopher A & Uhlig, Harald, 1991. "Understanding Unit Rooters: A Helicopter Tour," Econometrica, Econometric Society, vol. 59(6), pages 1591-99, November.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. Richard Clarida & Mark Gertler, 1996. "How the Bundesbank Conducts Monetary Policy," NBER Working Papers 5581, National Bureau of Economic Research, Inc.
  9. Christopher A. Sims & Tao A. Zha, 1998. "Does monetary policy generate recessions?," Working Paper 98-12, Federal Reserve Bank of Atlanta.
  10. 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.
  11. Eric M. Leeper & Tao Zha, 2000. "Assessing simple policy rules: a view from a complete macro model," Working Paper 2000-19, Federal Reserve Bank of Atlanta.
  12. 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.
  13. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  14. Angeloni, Ignazio & Ehrmann, Michael, 2003. "Monetary policy transmission in the euro area: any changes after EMU?," Working Paper Series 0240, European Central Bank.
  15. Eric M. Leeper & Tao Zha, 2001. "Assessing simple policy rules: A view from a complete macroeconomic model," Economic Review, Federal Reserve Bank of Atlanta, issue Q4, pages 35-58.
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Cited by:
  1. Horvath, Roman, 2006. "Financial Accelerator Effects in the Balance Sheets of Czech Firms," MPRA Paper 829, University Library of Munich, Germany.
  2. Magdalena M Borys & Roman Horvath, 2008. "The Effects of Monetary Policy in the Czech Republic: An Empirical Study," William Davidson Institute Working Papers Series wp922, William Davidson Institute at the University of Michigan.
  3. Rania Al Mashat & Andreas Billmeier, 2008. "The Monetary Transmission Mechanism in Egypt," Working Papers 411, Economic Research Forum, revised Jun 2008.
  4. Andreas Hoffmann, 2010. "An Overinvestment Cycle In Central And Eastern Europe?," Metroeconomica, Wiley Blackwell, vol. 61(4), pages 711-734, November.
  5. 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.
  6. Balázs Égert & Ronald MacDonald, 2008. "Monetary Transmission Mechanism in Central and Eastern Europe: Surveying the Surveyable," OECD Economics Department Working Papers 654, OECD Publishing.
  7. 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).
  8. 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.
  9. 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.
  10. Charalambos G. Tsangarides, 2010. "Monetary Policy Transmission in Mauritius Using a VAR Analysis," IMF Working Papers 10/36, International Monetary Fund.

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