In this paper, we examine the effects of Czech monetary policy on the economy within the VAR, structural VAR, and factor-augmented VAR frameworks. We document a wellfunctioning transmission mechanism similar to the euro area countries, especially in terms of persistence of monetary policy shocks. Subject to various sensitivity tests, we find that a contractionary monetary policy shock has a negative effect on the degree of economic activity and the price level, both with a peak response after one year or so.Regarding prices at the sectoral level, tradables adjust faster than non-tradables, which is in line with microeconomic evidence on price stickiness. There is no price puzzle, as our data come from a single monetary policy regime. There is a rationale in using the realtime output gap instead of current GDP growth, as using the former results in much more precise estimates. The results indicate a rather persistent appreciation of the domestic currency after a monetary tightening, with a gradual depreciation afterwards.
JEL Codes: E31, E52, E58.
Keywords: Monetary policy transmission, real-time data, sectoral prices, VAR.
Issued: October 2008
Published as: Borys, Morgese, M., Franta, M. and R. Horváth (2009): The Effects of Monetary Policy in the Czech Republic: An Empirical Study, Empirica, pp. 419-443.
Download: CNB WP No. 4/2008 (pdf, 412 kB)