ACADEMY OF ECONOMIC STUDIES DOCTORAL SCHOOL OF FINANCE AND BANKING

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ACADEMY OF ECONOMIC STUDIESDOCTORAL SCHOOL OF
FINANCE AND BANKING

• DISSERTATION PAPER
• SOME ASPECTS REGARDING MONETARY POLICY
  TRANSMISSION MECHANISM IN CENTRAL AND EASTERN
  EUROPEAN COUNTRIES
• MSc Student Andrei Birman
• Supervisor Professor Moisa Altar
• BUCHAREST -2004

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Content

• Introduction
• Monetary policy transmission mechanism theory
  and evidence
• Identification and estimation
• Discussion of the results
• Concluding remarks
• References

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Monetary policy transmission mechanism

• Traditional interest rate channel Blinder,
  1997interest sensitivity of business investment
  spending is subject to doubtmay have more to do
  with homebuilding and consumer durables
• Other assets price channel exchange rates
  affect relative prices between domestic and
  foreign goods ?affect domestic/foreign demand for
  domestic goods?aggregate demand channel
• 
  equities
• Credit view (Bernanke, Gertler) emphasize a
  combination of asymmetric information problems in
  credit markets and portfolio balance effects
  based on imperfect asset substitutability
• bank lending channel
• balance sheet
  channel finnacial accelerator the impact on
  investment of small interest changes is magnified
  by balance sheet effects
• Modern view (Cecchetti) assigns a special role
  to the financial structure and legal system.

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IDENTIFICATION and ESTIMATIONVector
Autoregressions VARsCholesky decompositionMode
l 1 P Y E R M2 Model 2 P Y E R M1

• Czech Republic 199801-200401 (1997 - currency
  turbulence and price liberalization)
• Hungary 199801-200402 (still some monetary
  policy independence availability of data)
• Poland 199706 200401 (exchange rate band /-
  10 )
• Romania 199706 200401 ( 1997 price
  liberalization)

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• Variables used

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Poland unit root tests
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Polonia - Model 1 P Y E R M2 2 lags
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Equation for prices
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Equation for industrial production

• Equation for nominal effective exchange rate

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Equation for interest rate

• Equation for M2

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Identification of Interest rate shocks(full
line impulse response function dotted lines
2 Std.error bands)
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Identification of Money shocks(full line
impulse response function dotted lines 2
Std.error bands) Responses to money shock (first
row M2, second row M1)
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• Factors that could influence and/or determine
  opposite responses from the two monetary
  aggregates.
• Czech National Bank Inflation Report, April
  2004,page 8
• .the monetary aggregate M1 maintained a growth
  rate that was supported by low interest rates,
  which are giving rise to a long term upward
  tendency in demand deposits at the expense of
  time deposits of corporations and households.
• National Bank of Romania, Inflation Report
  2/2003, page 42

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Identification of Exchange rate shocks(full line
impulse response function dotted lines 2
Std.error bands)
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Variance decomposition and Granger causality
testsprices --explain large part of their
variance inflation persistence
--procentual variance of P due to E - 40 at 12
months, in Czech R. and Romania industrial
production explain much of its variance
supply side has its own sources of variation
--still, in
Hungary and Poland, R accounts for Y variance at
longer horizonsBroad nominal money supply
explain 20 of price variance and (except Czech
R.) none of the Y variance

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Concluding Remarks

• ? interest rate?price puzzle in Poland , Czech
  R. (probably can be reduced if including foreign
  variables)
• ? a fall in Romanian
  prices not significant response for Hungary
• ? ? industrial
  production in Hungary and Poland no response for
  Romania and Czech R.
• Mixed evidence about monetary aggregates greater
  interest rate elasticity of M1, but, on average,
  do not seem to be better policy actions
  indicators than interest rates
• Exchange rates play an important role in each
  country seem to respond to interest rate
  movements and conversly, generates interst rate
  responses
• Future work must look inside the black box
• The fiscal side must be taken into consideration

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References

• 1 Altar, Moisa (2003), Macroeconomics ,
  lecture notes, DOFIN
• 2 Bernanke, Ben S. and Alan S. Blinder (1992),
  The Federal Funds Rate and the Channels of
  Monetary Transmission, The American Economic
  Review, Vol.82, No.4 (September), 901-921
• 3 ---------- (1988), Credit, Money and
  Aggregate Demand, NBER working paper no.2534
• 4 Bernanke, Ben S. and Mark Gertler (1995),
  Inside the Black Box The Credit Channel of
  Monetary Policy Transmission, NBER working paper
  no. 5146
• 5 Bernanke, Ben S. and Mishkin, Frederic
  (1997), Inflation Targeting A New Framework for
  Monetary Policy?, NBER Working Paper Series,
  Working Paper 5893
• 6 Blanchard, Olivier (1997), Is There a Core
  of Usable Macroeconomics?, The American Economic
  Review, Vol. 87, No. 2, pp. 244-246
• 7-----------, (2003), Comments on Inflation
  targeting in transition economies Experience and
  Prospects, by Jiri Jonas and Frederic Mishkin,
  NBER Conference on Inflation Targeting
• 8 Blinder, Alan, (1997), Is There a Core of
  Usable Macroeconomics We Should All Believe In?,
  The American Economic Review, Vol. 87, No. 2, pp.
  240-243
• 9 Botel, Cezar (2002) , The Determinants of
  Inflation in Romania June 1997-August 2001 A
  strucural VAR approach, National Bank of Romania
  paper series,
• 10 Brada, Josef and Ali Kutan (1999), The End
  of Moderate Inflation in Three Transition
  Economies? The William Davidson Institute at
  Univ. of Michigan Business School, wp 230
• 11 Cecchetti, Stephen G., (1999), Legal
  Structure, Financial Structure, and the Monetary
  Policy Transmission Mechanism, NBER working paper
  no.7151
• 12------------. (1995), Distinguishing
  Theories of the Monetary Transmission Mechanism,
  Federal Bank of St. Louis Review May/June
• 13 Christiano, Lawrence J., Martin Eichenbaum
  and Charles L. Evans (1998), Monetary Policy
  Shocks What Have We Learned and to What End?,
  Lawrence Christiano personal website
• 14 Clarida, Richard, Jordi Gali and Mark
  Gertler (1999), The Science of Monetary Policy
  A New Keynesian Perspective, NBER working paper
  no 7147
• 15 Cushman, David and Tao Zha (1995),
  Identifying Monetary Policy in a Small Open
  Economy Under Flexible Exchange Rates, Federal
  Reserve Bank of Atlanta, working paper no.95-7

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• 16 Eichenbaum, Martin (1997), Some Thoughts on
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• 17 Enders, Walter, (1993), Applied Econometric
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• 18 Friedman, Milton (1968), The Role of
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• 19 Greene, William H., (2000), Econometric
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• 20 Jakab, Zoltan and Mihaly Kovacs (2003),
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• 21 Jonas, Jiri and Frederic S. Mishkin, (2003),
  Inflation Targeting in Transition Economies
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• 22 Leeper, Eric, Christopher A. Sims, and Tao
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• 28 Peersman, Gert and Benoit Mojon, (2001), A
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• 29 Peersman, Gert and Frank Smets , (2001),
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• 30 Schmitt-Grohe, Stephanie and Martin Uribe
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• 34 Svensson, Lars E.O. (2000), Open-economy
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Inflation Report, (2003) third quarter,
National Bank of PolandInflation Report
(2004), april, Czech National Bank
Inflation Report 2/2003 National Bank of
Romania Quarterly Inflation Report,
February 2004, National Bank of Hungary