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Monetary Transmission in Three Central European Economies: Evidence from Time-Varying Coefficient Vector Autoregressions

  • Zsolt Darvas

    ()

    (Institute of Economics - Hungarian Academy of Sciences, Bruegel-Brussels, Corvinus University of Budapest)

This paper studies the transmission of monetary policy to macroeconomic variables in three new EU Member States in comparison with that in the euro area with structural time-varying coefficient vector autoregressions. In line with the Lucas Critique reduced-form models like standard VARs are not invariant to changes in policy regimes. The countries we study have experienced changes in monetary policy regimes and went through substantial structural changes, which call for the use of a time-varying parameter analysis. Our results indicate that in the euro area the impact on output of a monetary shock have decreased in time while in the new member states of the EU both decreases and increases can be observed. At the last observation of our sample, the second quarter of 2008, monetary policy was the most powerful in Poland and comparable in strength to that in the euro area, the least powerful responses were observed in Hungary while the Czech Republic lied in between. We explain these results by the credibility of monetary policy, openness and the share of foreign currency loans.

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Paper provided by Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences in its series IEHAS Discussion Papers with number 0913.

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Length: 32 pages
Date of creation: Jul 2009
Date of revision:
Handle: RePEc:has:discpr:0913
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  1. Zsolt Darvas & Gy�rgy Szap�ry, 2008. "Euro Area Enlargement and Euro Adoption Strategies," European Economy - Economic Papers 304, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  2. Marek Jarocinski, 2004. "Responses to Monetary Policy Shocks in the East and the West of Europe: A Comparison," CASE Network Studies and Analyses 0287, CASE-Center for Social and Economic Research.
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  13. Zsolt Darvas & Jean Pisani-Ferry, 2010. "The Threat of 'Currency Wars': a European Perspective," Working Papers 1006, Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest.
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  18. Brzoza-Brzezina, Michał & Chmielewski, Tomasz & Niedźwiedzińska, Joanna, 2007. "Substitution between domestic and foreign currency loans in Central Europe. Do central banks matter?," MPRA Paper 6759, University Library of Munich, Germany.
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  26. Francis, Neville & Owyang, Michael T., 2005. "Monetary Policy in a Markov-Switching Vector Error-Correction Model: Implications for the Cost of Disinflation and the Price Puzzle," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 305-313, July.
  27. Martina Cecioni & Stefano Neri, 2011. "The monetary transmission mechanism in the euro area: has it changed and why?," Temi di discussione (Economic working papers) 808, Bank of Italy, Economic Research and International Relations Area.
  28. Jean Boivin & Marc P. Giannoni & Benoît Mojon, 2009. "How Has the Euro Changed the Monetary Transmission Mechanism?," NBER Chapters, in: NBER Macroeconomics Annual 2008, Volume 23, pages 77-125 National Bureau of Economic Research, Inc.
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  30. Canova, Fabio & Gambetti, Luca, 2006. "Structural Changes in the US Economy: Bad Luck or Bad Policy?," CEPR Discussion Papers 5457, C.E.P.R. Discussion Papers.
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