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Risk premium shocks, monetary policy and exchange rate pass-through in the Czech Republic, Hungary and Poland

  • Balázs Vonnák

    ()

    (Magyar Nemzeti Bank)

This paper investigates the role of monetary policy in a small open economy, where exchange rate shocks are important. VAR models are estimated for the Czech Republic, Hungary and Poland. Contemporaneous and sign restrictions are imposed in order to identify the effect of monetary policy and risk premium shocks. Estimates from the same model for Canada, Sweden and the UK are used as benchmark for developed economies with low inflation. The results suggest that the typical size a of risk premium shock renders it almost impossible for the interest rate policy to smooth the exchange rate with the aim of minimising inflationary consequences. On the other hand, low inflation may decrease the exchange rate pass-through, which helps the monetary policy ignore exchange rate shocks.

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File URL: http://english.mnb.hu/Root/Dokumentumtar/ENMNB/Kiadvanyok/mnben_mnbfuzetek/mnben_WP_2010_1/wp_2010_1.pdf
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Paper provided by Magyar Nemzeti Bank (the central bank of Hungary) in its series MNB Working Papers with number 2010/1.

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Length: 32 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:mnb:wpaper:2010/1
Contact details of provider: Web page: http://www.mnb.hu/

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  1. 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.).
  2. 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.
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