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Title: ACADEMY OF ECONOMIC STUDIES DOCTORAL SCHOOL OF FINANCE AND BANKING


1
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

2
Content
  • Introduction
  • Monetary policy transmission mechanism theory
    and evidence
  • Identification and estimation
  • Discussion of the results
  • Concluding remarks
  • References

3
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.

4
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)

5
  • Variables used

6
(No Transcript)
7
Poland unit root tests
8
Polonia - Model 1 P Y E R M2 2 lags
9
(No Transcript)
10
Equation for prices
11
Equation for industrial production
  • Equation for nominal effective exchange rate

12
Equation for interest rate
  • Equation for M2

13
Identification of Interest rate shocks(full
line impulse response function dotted lines
2 Std.error bands)
14
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)
15
(No Transcript)
16
  • 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

17
Identification of Exchange rate shocks(full line
impulse response function dotted lines 2
Std.error bands)
18
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

19
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

20
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

21
  • 16 Eichenbaum, Martin (1997), Some Thoughts on
    Practical Stabilization Policy, The American
    Economic Review, Vol. 87, No. 2, pp. 236-239
  • 17 Enders, Walter, (1993), Applied Econometric
    Time Series, John WileySons Press
  • 18 Friedman, Milton (1968), The Role of
    Monetary Policy, American Economic Review,
    Vol.58, No.1 (March), pp. 1-17
  • 19 Greene, William H., (2000), Econometric
    Analysis, Prentice Hall International Press
  • 20 Jakab, Zoltan and Mihaly Kovacs (2003),
    Explaining the Exchange Rate Pass-Through in
    Hungary Simulations with the NIGEM Model, MNB
    working paper
  • 21 Jonas, Jiri and Frederic S. Mishkin, (2003),
    Inflation Targeting in Transition Economies
    Experiences and Prospects, NBER working paper
    no. 123
  • 22 Leeper, Eric, Christopher A. Sims, and Tao
    Zha, (1996), What does Monetary Policy Do?,
    Christopher Sims personal website
  • 23 Lutkepohl, Helmut and Jorg Breitung (1996),
    Impulse response Analysis of Vector
    Autoregressive Processes, Institut fur Statistik
    und Okonometrie, Humboldt Universitat zu Berlin
  • 24 Meltzer, Alan, (1995), Monetary, Credit and
    (other)Transmission Processes a monetarist
    perspective, Journal of Economic Perspectives,
    Vol.9, No.4 (Autumn), 49-72
  • 25 Mishkin, S. Frederic, (2001), The Economics
    of Money, Banking and Financial Markets, sixth
    edition, Addison-Wesley Press
  • 26 Monticelli, Carlo and Oreste Tristani,
    (1999), What does the single monetary policy do?
    A SVAR benchmark for the European Central Bank,
    European Central Bank working paper no.2
  • 27 Obstfeld, Maurice and Kenneth Rogoff,
    (1996), Foundations of International
    Macroeconomics, The MIT Press
  • 28 Peersman, Gert and Benoit Mojon, (2001), A
    VAR Description of the Effects of Monetary Policy
    in the Individual Coutries of the Euro Area,
    Eurosystem Monetary Transmission Mechanism
    Network, wp 92
  • 29 Peersman, Gert and Frank Smets , (2001),
    The Monetary Transmission Mechanism in the Euro
    Area more evidence from VAR analysis, European
    Central Bank, working paper no.91
  • 30 Schmitt-Grohe, Stephanie and Martin Uribe
    (2003), International Macroeconomics, lecture
    notes, Martin Uribe personal website
  • 31 Sims, Christopher A., (1991), Interpreting
    The Macroeconomics Time Series Facts The Effects
    Of Monetary Policy, personal website
  • 32----------., (1972), Money, Income and
    Causality, The American Economic Review, Vol.62,
    No.4 (September), 540-552
  • 33 Solow, M. Robert, (1997), Is There a Core
    of Usable Macroeconomics We Should All Believe
    In?, The American Economic Review, Vol. 87, No.
    2, pp. 230-232
  • 34 Svensson, Lars E.O. (2000), Open-economy
    inflation targeting, Journal of International
    Economics 50 (2000) pg.155-183

22
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 
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