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The Effects of Monetary Policy in the Czech Republic: An Empirical Study

In this paper, we examine the effects of Czech monetary policy on the economy within VAR and the structural VAR framework. We document well-functioning transmission mechanism similar to the euro area countries, especially in terms of persistence of monetary policy shocks. Subject to various sensitivity tests, we find that contractionary monetary policy shock has a negative effect on the degree of economic activity and price level, both with a peak response after one year or so. Regarding the prices at the sectoral level, tradables adjust faster than non-tradables, which is in line with microeconomic evidence on price persistence. There is a rationale in using the real-time output gap instead of current GDP growth as using the former results in much more precise estimates. There is no evidence for price puzzle within the system. The results indicate a rather persistent appreciation of domestic currency after monetary tightening with a gradual depreciation afterwards.

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Paper provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its series Working Papers IES with number 2007/26.

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Length: 26 pages
Date of creation: Oct 2007
Date of revision: Oct 2007
Handle: RePEc:fau:wpaper:wp2007_26
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