Economic Change and Restructuring

, Volume 45, Issue 3, pp 135–155 | Cite as

Monetary transmission and the financial sector in the Czech Republic

  • Tomáš Havránek
  • Roman HorváthEmail author
  • Jakub Matějů


In this paper, we (1) examine the interactions of financial variables and the macroeconomy within the block-restriction vector autoregression model and (2) evaluate to what extent the financial variables improve the forecasts of GDP growth and inflation. For this reason, various financial variables are examined, including those unexplored in previous literature, such as the share of liquid assets in the banking industry and the loan loss provision rate. Our results suggest that financial variables have a systematic and statistically significant effect on macroeconomic fluctuations. In terms of forecast evaluation, financial variables in general seem to improve the forecast of macroeconomic variables, but the predictive performance of individual financial variables varies over time, even though it strengthens during the 2008–2009 crisis. The results give some support for the risk-taking channel of monetary policy, as the level of the monetary policy rate is positively associated with the loan loss provision rate of commercial banks. Finally, a more stable financial system is found to contribute to faster economic growth.


Macroeconomic and financial linkages Vector autoregressions Forecasting 

JEL Classification

E44 E58 E47 G17 



We thank two anonymous referees, Jan Brůha, Zuzana Fungáčová, Jan Hanousek, and seminar participants at the Czech National Bank and the 11th International Conference “Financial and Monetary Stability in Emerging Countries” (Bucharest, Romania). This research was supported by Czech National Bank Research Project B3/10. The financial support from the Czech Science Foundation research grant no. P402/11/1487 is gratefully acknowledged.


  1. Assenmacher K, Gerlach S (2008a) Monetary policy, asset prices and macroeconomic conditions: a panel-var study, research series 200810-24, National Bank of BelgiumGoogle Scholar
  2. Assenmacher K, Gerlach S (2008b) Financial structure and the impact of monetary policy on asset prices, working papers 2008-16, Swiss National BankGoogle Scholar
  3. Babecka-Kucharcukova O (2009) Transmission of exchange rate shocks into domestic inflation: the case of the Czech Republic. Czech J Econ Finan 59(2):137–152Google Scholar
  4. Baboucek I, Jancar M (2005) Effects of macroeconomic shocks to the quality of the aggregate loan portfolio, Czech National Bank working paper no. 2/2005Google Scholar
  5. Bárta V, Singer M (2006) The Banking sector after 15 years of restructuring: Czech experience and lessons, BIS papers No. 28Google Scholar
  6. Borys Morgese M, Franta M, Horváth R (2009) The effects of monetary policy in the Czech Republic: an empirical study. Empirica 36(4):419–443CrossRefGoogle Scholar
  7. Čihák M, Heřmánek J, Hlaváček M (2007) New approaches to stress testing the Czech banking sector. Czech J Econ Finan 57(1–2):41–59Google Scholar
  8. Clark TE, West KD (2007) Approximately normal tests for equal predictive accuracy in nested models. J Econ 138:291–311Google Scholar
  9. CNB (2009) Financial stability report, Czech National BankGoogle Scholar
  10. Cushman DO, Zha T (1997) Identifying monetary policy in a small open economy under flexible exchange rates. J Monet Econ 39:433–448CrossRefGoogle Scholar
  11. Elbourne A, de Haan J (2006) Financial structure and monetary policy transmission in transition countries. J Comp Econ 34(1):1–23CrossRefGoogle Scholar
  12. Estrella A, Rodrigues AP, Schich S (2003) How stable is the predictive power of the yield curve? Evidence from Germany and the United States. Rev Econ Stat 85(3):629–644CrossRefGoogle Scholar
  13. Forni M, Hallin M, Lippi M, Reichlin L (2003) Do financial variables help forecasting inflation and real activity in the euro area? J Monet Econ 50(6):1243–1255CrossRefGoogle Scholar
  14. Goodhart C, Hofmann B (2000) Do asset prices help to predict consumer price inflation? Manch Sch 68:122–140CrossRefGoogle Scholar
  15. Goodhart C, Hofmann B (2008) House prices, money, credit, and the macroeconomy. Oxf Rev Econ Policy 24(1):180–205CrossRefGoogle Scholar
  16. Goodhart C, Osorio C, Tsomocos D (2009) An analysis of monetary policy and financial stability: a new paradigm, CESifo working paper no. 2885Google Scholar
  17. Hall P (1988) On symmetric bootstrap confidence intervals. J R Stat Soc B50:35–45Google Scholar
  18. Holub T (2008) Causes of deviations from the CNB’s inflation targets: an empirical analysis. Czech J Econ Finan 58(9–10):425–433Google Scholar
  19. Horváth R, Rusnák M (2009) How important are foreign shocks in a small open economy? The case of Slovakia. Global Econ J 9(1), Article 5Google Scholar
  20. Jacobson T, Linde J, Roszbach K (2005) Exploring interactions between real activity and the financial stance. J Finan Stab 1:308–341CrossRefGoogle Scholar
  21. Jiménez G, Ongena S, Peydró JL, Saurina J (2009) Hazardous times for monetary policy: what do twenty-three million bank loans say about the effects of monetary policy on credit risk? Banco de Espana working papers 0833, Banco de EspañaGoogle Scholar
  22. Lucchetta M (2007) What do data say about monetary policy, bank liquidity and bank risk taking? Econ Notes 36(2):189–203CrossRefGoogle Scholar
  23. Lütkepohl H (2006) New introduction to multiple time series analysis, 1st edn. Springer-Verlag, BerlinGoogle Scholar
  24. Maćkowiak B (2006) How much of the macroeconomic variation in Eastern Europe is attributable to external shocks? Comp Econ Stud 48(3):523–544CrossRefGoogle Scholar
  25. Mojon B, Peersman G (2001) A VAR description of the effects of monetary policy in individual countries of the euro area, ECB working paper no. 92Google Scholar
  26. Parrado E (2001) The effects of foreign and domestic monetary policy in a small open economy: the case of Chile, central bank of Chile working paper no. 108Google Scholar
  27. Stock JH, Watson MW (1998) Variable trends in economic time series. J Econ Perspect 2(3):147–174Google Scholar
  28. Stock JH, Watson MW (2003) Forecasting output and inflation: the role of asset prices. J Econ Lit 41(3):788–829CrossRefGoogle Scholar
  29. Stock JH, Watson MW (2008) Phillips curve inflation forecasts, NBER working papers 14322, National Bureau of Economic Research, Inc.Google Scholar
  30. Zha T (1999) Block recursion and structural vector autoregressions. J Econ 90:291–316Google Scholar

Copyright information

© Springer Science+Business Media, LLC. 2011

Authors and Affiliations

  • Tomáš Havránek
    • 1
  • Roman Horváth
    • 2
    Email author
  • Jakub Matějů
    • 3
  1. 1.Czech National Bank and Institute of Economic StudiesCharles UniversityPragueCzech Republic
  2. 2.Institute of Economic StudiesCharles UniversityPragueCzech Republic
  3. 3.CERGE-EI and Czech National BankPragueCzech Republic

Personalised recommendations