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, in particular during the 2008–2009 crisis.
JEL Codes: E44, E58, E47, G17
Keywords: Forecasting, macroeconomic and financial linkages, vector autoregressions
Issued: December 2010
Download: CNB WP No. 6/2010 (pdf, 590 kB)
Published as: Havránek, T., Horváth, R., and Matějů, J. (2011): Monetary Transmission and the Financial Sector in the Czech Republic. Economic Change and Restructuring, forthcoming.