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Evaluating Changes in the Monetary Transmission Mechanism in the Czech Republic

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  • Michal Franta
  • Roman Horvath
  • Marek Rusnak

Abstract

We investigate the evolution of the monetary policy transmission mechanism in the Czech Republic over the 1996-2010 period by employing a time-varying parameters Bayesian vector autoregression model with stochastic volatility. We evaluate whether the response of GDP and the price level to exchange rate or interest rate shocks changes over time, with a focus on the period of the recent financial crisis. Furthermore, we augment the estimated system with a lending rate and credit growth to shed light on the relative importance of financial shocks for the macroeconomic environment. Our results suggest that output and prices have become increasingly responsive to monetary policy shocks, probably reflecting financial sector deepening, more persistent monetary policy shocks, and overall economic development associated with disinflation. On the other hand, exchange rate pass-through has weakened somewhat over time, suggesting improved credibility of inflation targeting in the Czech Republic with anchored inflation expectations. We find that credit shocks had a more sizeable impact on output and prices during the period of bank restructuring with difficult access to credit. In general, our results show that financial shocks are less important for the aggregate economy in an environment of a stable financial system.

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Bibliographic Info

Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2011/13.

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Date of creation: Dec 2011
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Handle: RePEc:cnb:wpaper:2011/13

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Keywords: Monetary policy transmission; sign restrictions; time-varying parameters.;

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References

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Citations

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Cited by:
  1. Tomas Adam & Sona Benecka, 2013. "Financial Stress Spillover and Financial Linkages between the Euro Area and the Czech Republic," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 63(1), pages 46-64, March.
  2. Zsolt Darvas, 2009. "Monetary Transmission in three Central European Economies: Evidence from Time-Varying Coefficient Vector Autoregressions," DNB Working Papers 208, Netherlands Central Bank, Research Department.
  3. Arratibel, Olga & Michaelis, Henrike, 2014. "The impact of monetary policy and exchange rate shocks in Poland: evidence from a time-varying VAR," Working Paper Series 1636, European Central Bank.
  4. Oxana Babecka Kucharcukova & Michal Franta & Dana Hajkova & Petr Kral & Ivana Kubicova & Anca Podpiera & Branislav Saxa, 2013. "What We Know About Monetary Policy Transmission in the Czech Republic: Collection of Empirical Results," Research and Policy Notes 2013/01, Czech National Bank, Research Department.
  5. Robert Ambrisko & Vitezslav Augusta & Jan Babecky & Michal Franta & Dana Hajkova & Petr Kral & Jan Libich & Pavla Netusilova & Milan Rikovsky & Jakub Rysanek & Pavel Soukup & Petr Stehlik & Vilem Vale, 2013. "Macroeconomic Effects of Fiscal Policy," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, edition 2, volume 11, number rb11/2 edited by Jan Babecky & Kamil Galuscak, August.
  6. Jaromir Baxa & Michal Franta & Tomas Havranek & Roman Horvath & Miroslav Plasil & Marek Rusnak & Borek Vasicek, 2013. "Transmission of Monetary Policy," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, edition 1, volume 11, number rb11/1 edited by Jan Babecky & Roman Horvath, August.
  7. Chance Mwabutwa & Manoel Bittencourt & Nicola Viegi, 2013. "Evolution of Monetary Policy Transmission Mechanism in Malawi: A TVP-VAR Approach," Working Papers 201327, University of Pretoria, Department of Economics.

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