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How far does monetary policy reach? Evidence from factor-augmented vector autoregressions for Poland

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  • Mariusz Kapuściński

Abstract

This study applies factor-augmented vector autoregressions to identify the effects of monetary policy shocks in a small, open, emerging market economy. It uses data on 132 variables for Poland, ‘compressing’ them to either structural (having an economic interpretation) or economically uninterpretable factors, also known as diffusion indices. The tightening of monetary policy is found to have broad, contractionary effects. Among other things, production, building permits, retail trade, employment, job offers, prices, wages, loans and stock prices decrease, unemployment and non-performing loans increase. However, a rise in the interest rate does not appear to be associated with an appreciation of the exchange rate. But this result is not robust among studies using vector autoregressions, which calls for a different strategy to identify the causal effect. As one of extensions, the effects of changes in global and foreign factors are investigated. Domestic prices are found to respond to global prices of commodities and foreign prices. Domestic production and interest rates – to their foreign counterparts.

Suggested Citation

  • Mariusz Kapuściński, 2017. "How far does monetary policy reach? Evidence from factor-augmented vector autoregressions for Poland," NBP Working Papers 273, Narodowy Bank Polski.
    • Handle: RePEc:nbp:nbpmis:273
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    2. Łukasz Below, 2024. "Deconstructing the Fed’s decisions: analysis of the factors influencing monetary policy in the US," Bank i Kredyt, Narodowy Bank Polski, vol. 55(5), pages 623-660.

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    Keywords

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    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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