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Evaluating the Links Between the Financial and Real Sectors in a Small Open Economy: The Case of the Czech Republic

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  • Tomas Konecny
  • Oxana Babecka Kucharcukova

Abstract

Various approaches have been employed to study the possibility of non-linear feedback between the real and financial sector. We employ the threshold Bayesian VAR with block restrictions to evaluate the non-linear dynamics in a small open economy using the example of the Czech Republic. The study combines information on aggregate credit and non-performing loans (NPLs) to find that procyclicality of the financial sector matters for the real economy. A positive shock to credit and a negative shock to NPLs support industrial production over the entire time horizon, yet the responses do not differ substantially across credit spread regimes. Our results also suggest that the responses of the financial sector to real shocks differ depending on the credit market conditions. Finally, the direct impact of foreign factors on lending seems to be rather limited given that the financial sector in the Czech Republic is largely bank-based and funded predominantly by domestic deposits.

Suggested Citation

  • Tomas Konecny & Oxana Babecka Kucharcukova, 2013. "Evaluating the Links Between the Financial and Real Sectors in a Small Open Economy: The Case of the Czech Republic," Working Papers 2013/10, Czech National Bank.
    • Handle: RePEc:cnb:wpaper:2013/10
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    References listed on IDEAS

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    Cited by:

    1. Dominika Kolcunova & Tomas Havranek, 2018. "Estimating the Effective Lower Bound on the Czech National Bank’s Policy Rate," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 68(6), pages 550-577, December.
    2. Tomas Adam & Miroslav Plasil, 2014. "The Impact of Financial Variables on Czech Macroeconomic Developments: An Empirical Investigation," Working Papers 2014/11, Czech National Bank.

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    More about this item

    Keywords

    Credit; non-linearities; small open economy;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • 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
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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