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Spillover effects from euro area monetary policy across the EU: A factor-augmented VAR approach

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  • Potjagailo, Galina

Abstract

I analyze spillover effects from Euro area monetary policy shocks to thirteen EU countries outside the Euro area, i.e., ten countries from Central and Eastern Europe (CEE) and three Western EU members. The analysis is based on a FAVAR model with two blocks which exploits a large cross-country data set covering real activity variables, prices and financial variables. An expansionary Euro area monetary policy shock raises production in most non-Euro area countries. Somewhat larger and more instantaneous responses of production are observed in small open economies with fixed exchange rate regimes, where foreign demand effects are particularly strong. In addition, a Euro area monetary expansion leads to declines in interest rates and reductions in uncertainty in most non-Euro area countries. The spillovers on uncertainty are more pronounced in economies with flexible exchange rates, where the degree of financial market openness tends to be higher and where exchange rate appreciations further enhance risk taking by cushioning debt burdens from foreign currency loans. Finally, spillover effects on prices are heterogeneous across countries and behave asymmetrically in most CEE countries.

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  • Potjagailo, Galina, 2016. "Spillover effects from euro area monetary policy across the EU: A factor-augmented VAR approach," Kiel Working Papers 2033, Kiel Institute for the World Economy (IfW Kiel).
  • Handle: RePEc:zbw:ifwkwp:2033
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    Cited by:

    1. Jackson, Laura E. & Owyang, Michael T. & Zubairy, Sarah, 2018. "Debt and stabilization policy: Evidence from a Euro Area FAVAR," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 67-91.
    2. Roman Horvath & Klara Voslarova, 2017. "International spillovers of ECB’s unconventional monetary policy: the effect on Central Europe," Applied Economics, Taylor & Francis Journals, vol. 49(24), pages 2352-2364, May.
    3. Lucjan T. Orlowski, 2017. "Sensitivity of Interest Rates to Inflation and Exchange Rate in Poland: Implications for Direct Inflation Targeting," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 59(4), pages 545-560, December.
    4. Arthur Korus, 2019. "Spillover Effects from the ECB's Unconventional Monetary Policies: The Case of Denmark, Norway and Sweden," Athens Journal of Business & Economics, Athens Institute for Education and Research (ATINER), vol. 5(1), pages 53-78, January.

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    More about this item

    Keywords

    monetary policy; Euro area; Central and Eastern Europe; exchange rate regime; financial transmission; FAVAR;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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