Monetary Policy Transmission Mechanisms in the CEECs: How Important are the Differences with the Euro Area?

Abstract

We use a structural VAR model with short-term restrictions to investigate the relative importance of interest rate, exchange rate and credit channels in the monetary policy transmission (MPT) for the Czech Republic, Hungary and Poland over 1993:1-2004:3. Main results are as follows. First, in the three countries, following a positive shock on the interest rate, prices increase instead of decreasing, due to the immediate depreciation of the nominal exchange rate. The results thus exhibit an "exchange rate" puzzle conducing to the appearance of a "price-puzzle". Second, none channel is very powerful for the MPT in the three countries. Nevertheless, the exchange rate and the interest rate channels play a growing role over the recent period in Poland, compared with the same channels in the Czech Republic and Hungary. As nominal exchange rate fluctuations allow for greater real shocks dampening in Poland, the cost of entering EMU may be more costly for this country than for the Czech Republic or Hungary. * We are grateful to Benoît Usciati for his able research assistance. The usual disclaimer applies.

The effects of monetary policy in the Czech Republic: an empirical study

“…Next, there are a number of papers analyzing and comparing the effects of monetary policy in groups of Central and Eastern European countries vis-à-vis other, more advanced economies (Creel and Levasseur 2005;Darvas 2005;EFN 6 2004;Héricourt 2005). Many studies find evidence of price and/or exchange rate puzzles for the Czech Republic.…”

Monetary Transmission Mechanism in Central and Eastern Europe: Surveying the Surveyable

“…For Poland, Wróbel (2001) shows that a shock in short-term interest rates causes real credit to drop in the short run and to stabilize at a lower level afterward. Creel and Levasseur (2005) find that, after the initial decrease, credit recovers for Poland. For the Czech Republic and Hungary, the results indicate a short-term rise rather than a fall in the credit series after a monetary policy shock.…”

Monetary Transmission Mechanism in Central and Eastern Europe: Surveying the Surveyable

“…Arnostova and Hurník (2004) CZ, full period: foreign exchange and price puzzle, output: U-shaped 1998, price and output: U-shaped, no foreign exchange puzzle Bitans et al (2003) LV, prices: slow decrease and then slow recovery Creel and Levasseur (2005) Inflation: price puzzle for all countries Output increases for 1999 to 2004, no reaction for HU Darvas (2005) Price puzzle in CZ (1998CZ ( , 2004, HU (1994HU ( , 1998, drop in prices in PL Output: drops most in PL, least in HU, but recovers more quickly in PL than in HU Response profiles change over time EFN (2004) Mostly not significant (EE, SI, LT) Inflation: CZ price puzzle, HU, LV U-shaped, SK permanent decrease (Q), U-shaped (M), PL significant change (Q, M) Output: CZ, HU U-shaped; PL strong drop then recovery (M), SK permanent increase Elbourne and de Haan (2006) CEE-10; inflation: largest and quickest drop in SK and RO; PL, CZ protracted, others small; H price puzzle Output: large and quick drop; CZ mostly quick; SK and EE slow Ganev et al (2002) Inflation: SI, CZ permanent rise, LV, SK temporary fall, HU permanent fall Output: decrease is fastest in HU, more permanent in CZ, decreases and adjustment in SK and increases in the remaining countries; BG, RO: large fluctuations Héricourt (2005) Inflation: CZ, price and foreign exchange puzzle; HU, SI price puzzle Output: CZ, GDP and IIP different EE, PL, SK: no significant change Jarociński (2005) CEE-4: decline in output and prices Kuijs (2001 M2 shock: SK, increase in inflation (unit labour cost increase), little impact on output. Maliszewski (1999) Inflation: PL declines and recovers partially Output: PL declines and recovers partially (more strongly than inflation) Maliszewski (2002) Inflation: CZ, PL slow decline and stabilization at lower level Output: CZ, PL hump-shaped, but not full recovery Vonnák (2005) HU: 1992 to 2003 price puzzle HU: 1995 to 2003 quick decline in output, slow decline in prices, currency appreciation Wróbel (2001) Prices: PL increase followed by decrease and slight recovery, but still negative Output: PL increase followed by decrease and full recovery Credit: PL large decrease followed by slow recovery Note: CZ, EE, HU, LV, LT, PL, RO, SK, SI denote the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia.…”

“…the early 1990s and that rely on recursive VAR models (European Forecasting Network, 2004;Creel and Levasseur, 2005;Héricourt, 2005) tend to obtain a price puzzle. In contrast, papers allowing for changes in the parameter estimates either by splitting the whole sample into subsamples (Arnostova and Hurník, 2004;Vonnák, 2005), by relying on genuine time-varying coefficient estimates (Darvas, 2005) or by employing a more sophisticated and hence more precise identification scheme of monetary policy innovation (Vonnák, 2005;Jarociński, 2005) find less evidence for that.…”