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Evaluating changes in the monetary transmission mechanism in the Czech Republic

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Abstract

We investigate the evolution of the monetary policy transmission mechanism in the Czech Republic over the course of the 1996–2010 time period through the use of a time-varying parameters Bayesian vector autoregression model with stochastic volatility. We evaluate whether the response of GDP and the price level to exchange rate or interest rate shocks has changed over time, focusing on the period of the recent financial crisis. Our results suggest that prices have become increasingly responsive to monetary policy shocks. However, in terms of credible intervals, the stability of the monetary policy transmission mechanism in the Czech Republic cannot be rejected. Furthermore, it is demonstrated that the exchange rate pass-through has largely remained stable over time.

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Notes

  1. The symbol \(\otimes \) denotes the Kronecker product.

  2. We assume that \(S\) is block diagonal, i.e. we presume that the contemporaneous relationships among the variables evolve independently. For example, there are three blocks of \(S\) in the VAR that consists of four variables. Furthermore, to reduce the dimensionality of the estimation, we impose the condition that the matrix \(W\) must be diagonal (Kirchner et al. 2010).

  3. This issue arises because there are no pre-1996 data available for the Czech Republic. We attempted to use data for Slovakia and the UK to construct priors; however, a simple VAR analysis revealed that the transmission mechanisms of the Czech Republic, Slovakia and the UK are not similar. For example, lagged GDP (modelled in terms of differences) produces opposite effects on GDP in the Czech Republic than in Slovakia or the UK. This discrepancy is a consequence of the restrictions imposed by the use of only two lags, a condition that is largely dictated by the methodology that is used for this study (a TVP VAR approach).

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Acknowledgments

We are grateful to anonymous referee, Oxana Babecká, Tomáš Holub, Marek Jarociñski, Balázs Vonnák and seminar participants at the Czech National Bank and at the Economic Challenges in Enlarged Europe conference (Tallinn, Estonia) for helpful comments. We acknowledge financial support from the Grant Agency of Charles University (Grant Number 365111) and Grant Agency of Czech Republic (Grant P402/09/0965). The work was supported by Czech National Bank Project No. A2/2011. The views expressed here are those of the authors and not necessarily those of the Czech National Bank.

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Authors and Affiliations

  1. Czech National Bank, Na Prikope 28, 115 03 , Prague 1, Czech Republic

    Michal Franta & Marek Rusnak

  2. Institute of Economic Studies, Charles University, Opletalova 26, 110 00 , Prague 1, Czech Republic

    Roman Horvath & Marek Rusnak

  3. Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Pod Vodarenskou vezi 4, 182 08 , Prague 8, Czech Republic

    Roman Horvath

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  1. Michal Franta
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  2. Roman Horvath
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  3. Marek Rusnak
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Correspondence to Roman Horvath.

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Franta, M., Horvath, R. & Rusnak, M. Evaluating changes in the monetary transmission mechanism in the Czech Republic. Empir Econ 46, 827–842 (2014). https://doi.org/10.1007/s00181-013-0699-0

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