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Risk Premium Shocks, Monetary Policy And Exchange Rate Pass-Through In The Czech Republic, Hungary And Poland

  • BALÁZS VONNÁK

    ()

This paper investigates the role of monetary policyin a small open economy, where exchange rateshocks are important. VAR models are estimatedfor the Czech Republic, Hungary and Poland. Contemporaneousand sign restrictions are imposedin order to identify the effect of monetary policyand risk premium shocks. Estimates from the samemodel for Canada, Sweden and the UK are used asa benchmark for developed economies with low inflation.The results suggest that the typical size ofa risk premium shock renders it almost impossiblefor the interest rate policy to smooth the exchangerate with the aim of minimizing inflationary consequences.On the other hand, low inflation may decreasethe exchange rate pass-through, which helpsthe monetary policy ignore exchange rate shocks.

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Article provided by BANCO DE LA REPÚBLICA - ESPE in its journal ENSAYOS SOBRE POLÍTICA ECONÓMICA.

Volume (Year): (2010)
Issue (Month): ()
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Handle: RePEc:col:000107:008326
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  1. Darvas, Zsolt, 2001. "Exchange rate pass-through and real exchange rate in EU candidate countries," Discussion Paper Series 1: Economic Studies 2001,10, Deutsche Bundesbank, Research Centre.
  2. Jon Faust, 1998. "The robustness of identified VAR conclusions about money," International Finance Discussion Papers 610, Board of Governors of the Federal Reserve System (U.S.).
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