This paper analyses the differences in reaction of domestic and foreign currency lending to monetary and exchange rate shocks, using a panel VAR model estimated for three biggest Central and Eastern European countries (Poland, the Czech Republic and Hungary). Our results point toward a drop in domestic currency loans and an increase of foreign currency credit in reaction to monetary policy tightening in Poland and Hungary, suggesting that the presence of foreign currency debt weakens the transmission of monetary policy. A currency depreciation shock leads to an initial decline in foreign currency lending, but also in loans denominated in domestic currency as central banks react to a weaker exchange rate by increasing the interest rates. However, after several quarters, credit in foreign currency accelerates, indicating that borrowers start using it to substitute for depressed domestic currency lending.

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We use a structural macroeconomic model with search and matching frictions on the labour market to analyse the differences in the business cycle fluctuations of the labour wedge between two CEE countries and the Euro Area. Our results indicate that the observed higher volatility of this wedge in the CEE region reflects mainly different characteristics of stochastic disturbances rather than country-specific features of the labour market. We also identify significant differences in the sources of labour wedge fluctuations across the considered economies. Overall, we find that the labour wedge movements and hence the welfare costs of business cycle fluctuations in Poland are connected with inefficient functioning of the labour market. To the contrary, wedge fluctuations in the Czech Republic and the EA seem to result from the financial frictions.