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External Information and Monetary Policy Transmission in New EU Member States: Results from FAVAR Models

  • Zlatina Balabanova


    (Department of Economics, University of Konstanz, Germany)

  • Ralf Brüggemann


    (Department of Economics, University of Konstanz, Germany)

We investigate the e_ects of monetary policy shocks in the new European Union member states Czech Republic, Hungary, Poland and Slovakia. In contrast to existing studies, we explicitly account for external developments in European Monetary Union (EMU) countries and in other acceding countries. We do so by using factor-augmented vector-autoregressive models that employ the information from non-stationary factor time series. One set of VAR models includes factors obtained from a large cross-section of time series from EMU countries, while another set includes factors obtained from other acceding countries. We use cohesion analysis to facilitate the interpretation of the different factor time series. We find that including the EMU factors does not greatly affect the impulse response patterns in acceding countries. In contrast, including factors from other accession countries leads to substantial changes in impulse responses and to economically more plausible results. Overall, our analysis highlights that taking into account external economic developments properly is crucial for the analysis of monetary policy in the new EU member states.

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Paper provided by Department of Economics, University of Konstanz in its series Working Paper Series of the Department of Economics, University of Konstanz with number 2012-05.

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Length: 35 pages
Date of creation: 27 Mar 2012
Date of revision:
Handle: RePEc:knz:dpteco:1205
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