Conditional dynamics of monetary policy shocks: the mitigating role of macroprudential policy in CESEE

This study examines the economic effects of monetary policy (short-term interest rate shocks) and its interaction with macroprudential policy in 11 EU member states of Central, Eastern and Southeastern Europe (CESEE) over the period from 2000 to 2019. Employing a smooth transition vector autoregressive model, we assess how the impacts of interest rate shocks vary with the intensity of macroprudential policies and across different exchange rate regimes. We find that in countries with flexible exchange rates, monetary policy tightening tends to persist longer and is often offset by easing macroprudential measures, particularly when these policies are already stringent. This pattern is less evident in countries with fixed exchange rates, where interest rate shocks do not always represent independent monetary policy actions. Overall, muted macrofinancial responses across the sample suggest that macroprudential measures may counterbalance the effect of monetary policy (interest rate) shocks and that traditional monetary tools have been less effective in the latter half of our sample period. These results highlight the importance of incorporating macroprudential indicators into monetary policy analysis and contribute to discussions on policy coordination, offering insights to help optimize policy mixes to enhance economic resilience.