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Risk premium shocks, monetary policy and exchange rate pass-through in the Czech Republic, Hungary and Poland

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  • Balázs Vonnák

    (Magyar Nemzeti Bank)

Abstract

This paper investigates the role of monetary policy in a small open economy, where exchange rate shocks are important. VAR models are estimated for the Czech Republic, Hungary and Poland. Contemporaneous and sign restrictions are imposed in order to identify the effect of monetary policy and risk premium shocks. Estimates from the same model for Canada, Sweden and the UK are used as benchmark for developed economies with low inflation. The results suggest that the typical size a of risk premium shock renders it almost impossible for the interest rate policy to smooth the exchange rate with the aim of minimising inflationary consequences. On the other hand, low inflation may decrease the exchange rate pass-through, which helps the monetary policy ignore exchange rate shocks.

Suggested Citation

  • Balázs Vonnák, 2010. "Risk premium shocks, monetary policy and exchange rate pass-through in the Czech Republic, Hungary and Poland," MNB Working Papers 2010/1, Magyar Nemzeti Bank (Central Bank of Hungary).
    • Handle: RePEc:mnb:wpaper:2010/1
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    References listed on IDEAS

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    Cited by:

    1. Ábel, István & Kóbor, Ádám, 2010. "A monetáris restrikció hatása strukturális VAR keretben [The effect of monetary restriction in a vector auto-regression framework]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(5), pages 412-430.
    2. 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.
    3. Gábor Pellényi, 2012. "The Sectoral Effects of Monetary Policy in Hungary: A Structural Factor Analysis," MNB Working Papers 2012/1, Magyar Nemzeti Bank (Central Bank of Hungary).
    4. Ms. Adina Popescu & Ms. Alina Carare, 2011. "Monetary Policy and Risk-Premium Shocks in Hungary: Results from a Large Bayesian VAR," IMF Working Papers 2011/259, International Monetary Fund.
    5. Pellényi, Gábor, 2012. "A monetáris politika hatása a magyar gazdaságra. Elemzés strukturális, dinamikus faktormodellel [The sectoral effects of monetary policy in Hungary: a structural factor]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(3), pages 263-284.
    6. Péter Gábriel & György Molnár & Judit Várhegyi, 2016. "Fixing an impaired monetary transmission mechanism: the Hungarian experience," BIS Papers chapters, in: Bank for International Settlements (ed.), Inflation mechanisms, expectations and monetary policy, volume 89, pages 179-191, Bank for International Settlements.
    7. Tunç, Cengiz, 2017. "A Survey on Exchange Rate Pass through in Emerging Markets," Bulletin of Economic Theory and Analysis, BETA Journals, vol. 2(3), pages 205-233, July-Sept.
    8. Szabolcs Szikszai & Tamás Badics & Csilla Raffai & Zsolt Stenger & András Tóthmihály, 2013. "Studies in Financial Systems No 8 Hungary," FESSUD studies fstudy08, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    9. Michal Franta & Roman Horvath & Marek Rusnak, 2014. "Evaluating changes in the monetary transmission mechanism in the Czech Republic," Empirical Economics, Springer, vol. 46(3), pages 827-842, May.
    10. Aron Gereben & Ferenc Karvalits & Zalan Kocsis, 2011. "Monetary policy challenges during the crisis in a small open dollarised economy: the case of Hungary," BIS Papers chapters, in: Bank for International Settlements (ed.), Capital flows, commodity price movements and foreign exchange intervention, volume 57, pages 179-188, Bank for International Settlements.
    11. László Békési & Csaba Köber & Henrik Kucsera & Tímea Várnai & Balázs Világi, 2016. "The macroeconomic forecasting model of the MNB," MNB Working Papers 2016/4, Magyar Nemzeti Bank (Central Bank of Hungary).
    12. Feldkircher, Martin, 2015. "A global macro model for emerging Europe," Journal of Comparative Economics, Elsevier, vol. 43(3), pages 706-726.
    13. Tayfur Bayat & Saban Nazlioglu & Selim Kayhan, 2015. "Exchange Rate and Oil Price Interactions in Transition Economies: Czech Republic, Hungary and Poland," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 62(3), pages 267-285, June.
    14. Bálint Tamási & Balázs Világi, 2011. "Identification of credit supply shocks in a Bayesian SVAR model of the Hungarian economy," MNB Working Papers 2011/7, Magyar Nemzeti Bank (Central Bank of Hungary).
    15. Judita Jurasekova Kucserova, 2009. "Effects of Monetary Policy Shocks in Slovakia," Working and Discussion Papers DP 1/2009, Research Department, National Bank of Slovakia.
    16. Mihály Hajnal & György Molnár & Judit Várhegyi, 2015. "Exchange rate pass - through after the crisis: the Hungarian experience," MNB Occasional Papers 2015/121, Magyar Nemzeti Bank (Central Bank of Hungary).
    17. K. Istrefi & B. Vonnak, 2015. "Delayed Overshooting Puzzle in Structural Vector Autoregression Models," Working papers 576, Banque de France.
    18. Valentinyi, Ákos & Bihari, Péter, 2010. "Pirruszi dezinfláció vagy tartósan alacsony inflációs környezet? [Pyrrhic deflation or a persistently low-inflation environment?]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(10), pages 868-875.
    19. Zsuzsanna Hosszú & Gyöngyi Körmendi & Bálint Tamási & Balázs Világi, 2013. "Impact of the credit supply on the Hungarian economy," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 8(Special), pages 81-90, October.

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    More about this item

    Keywords

    monetary policy; risk premium shocks; exchange rate pass-through; structural VAR; sign restriction;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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