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Monetary policy transmission mechanisms in the CEECs: How important are the differences with the euro area?

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We use a structural VAR model with short-term restrictions to investigate the relative importance of interest rate, exchange rate and credit channels in the monetary policy transmission (MPT) for the Czech Republic, Hungary and Poland over 1993:1-2004:3. Main results are as follows. First, in the three countries, following a positive shock on the interest rate, prices increase instead of decreasing, due to the immediate depreciation of the nominal exchange rate. The results thus exhibit an "exchange rate" puzzle conducing to the appearance of a "price-puzzle". Second, none channel is very powerful for the MPT in the three countries. Nevertheless, the exchange rate and the interest rate channels play a growing role over the recent period in Poland, compared with the same channels in the Czech Republic and Hungary. As nominal exchange rate fluctuations allow for greater real shocks dampening in Poland, the cost of entering EMU may be more costly for this country than for the Czech Republic or Hungary.

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Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2005-02.

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Date of creation: 2005
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Handle: RePEc:fce:doctra:0502

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Keywords: monetary policy transmission; VAR models; exchange rate regimes;

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  1. Giordani, Paolo, 2000. "An alternative explanation of the price puzzle," Working Paper Series in Economics and Finance 414, Stockholm School of Economics, revised 06 Dec 2000.
  2. Jérôme Creel & Sandrine Levasseur, 2004. "How would a fixed-exchange-rate regime fit the transition economies?. The cases of the Czech Republic, Hungary and Poland," Revue de l'OFCE, Presses de Sciences-Po, vol. 91(5), pages 83-120.
  3. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc.
  4. Lionel Halpern & Charles Wyplosz, 1996. "Equilibrium Exchange Rates in Transition Economies," IMF Working Papers 96/125, International Monetary Fund.
  5. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-21, September.
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  7. Putkuri , Hanna, 2003. "Cross-country asymmetries in euro area monetary transmission: the role of national financial systems," Research Discussion Papers 15/2003, Bank of Finland.
  8. Cottarelli, Carlo & Dell'Ariccia, Giovanni & Vladkova-Hollar, Ivanna, 2005. "Early birds, late risers, and sleeping beauties: Bank credit growth to the private sector in Central and Eastern Europe and in the Balkans," Journal of Banking & Finance, Elsevier, vol. 29(1), pages 83-104, January.
  9. Ekaterina Vostroknutova, 2003. "Polish Stabilization: What can we learn from the I(2) Cointegration Analysis?," Economic Change and Restructuring, Springer, vol. 36(2), pages 177-198, June.
  10. Jarocinski, Marek, 2006. "Responses to Monetary Policy Shocks in the East and the West of Europe: A Comparison," Working Papers 124, Oesterreichische Nationalbank (Austrian Central Bank).
  11. Stephen G. Cecchetti, 1999. "Legal structure, financial structure, and the monetary policy transmission mechanism," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 9-28.
  12. Hanson, Michael S., 2004. "The "price puzzle" reconsidered," Journal of Monetary Economics, Elsevier, vol. 51(7), pages 1385-1413, October.
  13. FFF1Jitka NNN1Rychtarikova, 2004. "The case of the Czech Republic," Demographic Research Special Collections, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 2(5), pages 105-138, April.
  14. Alessio Anzuini & Aviram Levy, 2004. "Financial structure and the transmission of monetary shocks: preliminary evidence for the Czech Republic, Hungary and Poland," Temi di discussione (Economic working papers) 514, Bank of Italy, Economic Research and International Relations Area.
  15. 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.
  16. Georgy Ganev & Krisztina Molnar & Krzysztof Rybinski & Przemyslaw Wozniak, 2002. "Transmission Mechanism of Monetary Policy in Centraland Eastern Europe," CASE Network Reports 0052, CASE-Center for Social and Economic Research.
  17. Bonin, John & Wachtel, Paul, 2002. "Financial sector development in transition economies: Lessons from the first decade," BOFIT Discussion Papers 9/2002, Bank of Finland, Institute for Economies in Transition.
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