Empirica

, Volume 40, Issue 2, pp 363–390 | Cite as

Monetary transmission in three central European economies: evidence from time-varying coefficient vector autoregressions

Original Paper

Abstract

We study the transmission of monetary policy to macroeconomic variables with structural time-varying coefficient vector autoregressions in the Czech Republic, Hungary and Poland, in comparison with that in the euro area. These three countries have experienced changes in monetary policy regimes and went through substantial structural changes, which call for the use of a time-varying parameter analysis. Our results indicate that the impact on output of a monetary shock changed over time. At the point of the last observation of our sample, the fourth quarter of 2011, among the three countries, monetary policy was most powerful in Poland and not much less strong than the transmission in the euro area. We discuss various factors that can contribute to differences in monetary transmission, such as financial structure, labour market rigidities, industry composition, exchange rate regime, credibility of monetary policy and trade openness.

Keywords

Monetary transmission Time-varying coefficient vector autoregressions Kalman-filter 

JEL Classification

C32 E50 

Notes

Acknowledgments

I am thankful to Fabio Canova, Peter van Els, Leo de Haan, Benoît Mojon, András Simon, Peter Vlaar, three anonymous referees, seminar participants at De Nederlandsche Bank, Magyar Nemzeti Bank and Oesterreichische Nationalbank, and conference participants at the Annual Congress of the European Economic Association and at the ECOMOD for comments and suggestions on earlier versions of this article. Part of this research was conducted while I was a visiting scholar at De Nederlandsche Bank, whose hospitality is gratefully acknowledged. The views expressed in this article do not necessarily represent those of De Nederlandsche Bank. Financial support from OTKA grant No. K76868 is gratefully acknowledged.

References

  1. Angeloni I, Anil KK, Benoît M (eds) (2003) Monetary policy transmission in the Euro area: a study by the eurosystem monetary transmission network. Cambridge University Press, CambridgeGoogle Scholar
  2. Beck T, Demirgüç-Kunt A (2009) Financial institutions and markets across countries and over time: data and analysis. World Bank Policy Research Working Paper No. 4943, May 2009Google Scholar
  3. Boivin J, Giannoni MP, Mojon B (2008) How has the euro changed the monetary transmission? NBER Working Paper No. 14190Google Scholar
  4. Borys M, Horváth R, Franta M (2009) The effects of monetary policy in the Czech Republic: an empirical study. Empirica 36(4):419–443CrossRefGoogle Scholar
  5. Brzoza-Brzezina M, Chmielewski T, Niedźwiedzińska J (2010) Substitution between domestic and foreign currency loans in Central Europe. Do central banks matter? ECB Working Paper no 1187Google Scholar
  6. Canova F, De Nicolo G (2002) Monetary disturbances matter for business cycles fluctuations in the G7. J Monet Econ 49:1131–1159CrossRefGoogle Scholar
  7. Canova F, Gambetti L (2006) Structural changes in the US economy. Bad luck or bad policy? CEPR discussion paper No. 5457Google Scholar
  8. Cecioni M, Neri S (2011) The monetary transmission mechanism in the euro area: has it changed and why? Working Paper 808, Banca d’ItaliaGoogle Scholar
  9. Christiano LJ, Eichenbaum M, Evans CL (1999) Monetary policy shocks: what have we learned and to what end? In: Taylor JB, Woodford M (eds) Handbook of macroeconomics, vol 1A. Elsevier Science, New York, pp 65–148CrossRefGoogle Scholar
  10. Ciccarelli M, Rebucci A (2006) Has the transmission mechanism of european monetary policy changed in the run-up to EMU? Eur Econ Rev 50:737–776CrossRefGoogle Scholar
  11. Cogley T, Sargent TJ (2005) Drifts and volatilities: monetary policies and outcomes in the post WWII US. Rev Econ Dyn 8:262–302CrossRefGoogle Scholar
  12. Darvas Z (2001) Exchange rate pass-through and real exchange rate in EU candidate countries. Deutsche Bundesbank Discussion Paper 10/2001Google Scholar
  13. Darvas Z (2012) Real effective exchange rates for 178 countries: a new database. Bruegel Working Paper 2012/5Google Scholar
  14. Darvas Z, Pisani-Ferry J (2010) The threat of ‘currency wars’: A European perspective. Bruegel Policy Contribution 2010/12Google Scholar
  15. Darvas Z, Szapáry G (2000) Financial contagion in five small open economies: does the exchange rate regime really matter? Int Financ 3(1):25–51CrossRefGoogle Scholar
  16. Darvas Z, Szapáry G (2010) Euro area enlargement and Euro adoption strategies. In: Buti M, Servaas D, Vitor G, João Nogueira M (eds) Euro-the first decade. Cambridge University Press, Cambridge, pp 823–869Google Scholar
  17. Égert B, MacDonald R (2009) Monetary transmission mechanism in central and eastern Europe: surveying the surveyable. J Econ Surv 23(2):277–327CrossRefGoogle Scholar
  18. Faust J, Leeper EM (1997) When do long-run identifying restrictions give reliable results? J Bus Econ Stat 15(3):345–353Google Scholar
  19. Francis N, Owyang MT (2005) Monetary policy in a Markov-Switching vector error-correction model: implications for the cost of disinflation and the price puzzle. J Bus Econ Stat 23(3):305–313CrossRefGoogle Scholar
  20. Franta M, Horváth R, Rusnák M (2011) Evaluating changes in the monetary transmission mechanism in the Czech Republic. Czech National Bank Working Paper 13/2011Google Scholar
  21. Fry R, Pagan A (2011) Sign restrictions in structural vector autoregressions: a critical review. J Econ Lit 49(4):938–960CrossRefGoogle Scholar
  22. Georgiadis G (2012) Towards an explanation of cross-country asymmetries in monetary transmission. Deutsche Bundesbank Discussion Paper 07/2012Google Scholar
  23. Granger CWJ (2008) Non-linear models: where do we go next—time varying parameter models? Stud Nonlinear Dynam Econom 12(3). The Berkeley Electronic PressGoogle Scholar
  24. Hamilton JD (1994) Time series analysis. Princeton University Press, PrincetonGoogle Scholar
  25. Hanson MS (2004) The “price-puzzle” reconsidered. J Monet Econ 51:138–1413CrossRefGoogle Scholar
  26. He C, Teräsvirta T, González A (2009) Testing parameter constancy in stationary vector autoregressive models against continuous change. Econom Rev 28(1–3):225–245Google Scholar
  27. Jarociński M (2010) Responses to monetary policy shocks in the east and the west of Europe: a comparison. J Appl Econ 25(5):833–868CrossRefGoogle Scholar
  28. Lucas RE (1976) Econometric policy evaluation: a critique. Carnegie-Rochester Conf Ser Public Policy 1(1):19–46CrossRefGoogle Scholar
  29. Peersman G (2005) What caused the early millennium slowdown? Evidence based on vector autoregressions. J Appl Econ 20:185–207CrossRefGoogle Scholar
  30. Primiceri GE (2005) Time varying structural vector autoregressions and monetary policy. Rev Econ Stud 72(3):821–852CrossRefGoogle Scholar
  31. Sims CA (1992) Interpreting macroeconomic time series facts: the effects of monetary policy. Eur Econ Rev 36(5):975–1000CrossRefGoogle Scholar
  32. Sims CA, Zha T (2006) Were there regime switches in US monetary policy? Am Econ Rev 96(1):54–81CrossRefGoogle Scholar
  33. Stock JH, Watson MW (2005) Understanding changes in international business cycle dynamics. J Eur Econ Assoc 3(5):968–1006CrossRefGoogle Scholar
  34. Szapáry G, Jakab ZM (1998) Exchange rate policy in transition economies: the case of Hungary. J Comp Econom 26(4):691–717CrossRefGoogle Scholar
  35. Uhlig H (2005) What are the effects of monetary policy: results from an agnostic identification approach. J Monet Econ 52:381–419CrossRefGoogle Scholar
  36. Várpalotai V (2003) Numerical method for estimating GDP data for Hungary. Magyar Nemzeti Bank Working Paper No 2003/2Google Scholar
  37. Weber AA, Gerke R, Worms A (2011) Changes in euro area monetary transmission? Appl Financ Econ 21(3):131–145CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2012

Authors and Affiliations

  1. 1.BruegelBrusselsBelgium
  2. 2.Institute of Economics of the Hungarian Academy of SciencesBudapestHungary
  3. 3.Corvinus University of BudapestBudapestHungary

Personalised recommendations