How Important Are Foreign Shocks in Small Open Economy? The Case of Slovakia

Roman Horvath and Marek Rusnák

No 2008/21, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: In this paper, we provide evidence on the nature and the relative importance of domestic and foreign shocks in Slovak economy based on block-restriction vector autoregression model in 1999-2007. We document well-functioning monetary transmission mechanism in Slovakia. Subject to various sensitivity checks, we find that contractionary monetary policy shock has a temporary negative effect on the degree of economic activity and price level. We find that using output gap instead of GDP alleviates the price puzzle. In general, prices are driven mainly by foreign factors and the European Central Bank monetary policy shock on Slovak prices is more powerful than that of the National Bank of Slovakia. Slovak central bank interest rate policy seems to follow the ECB’s interest rates. On the other hand, spectacular Slovak economic growth is primarily driven by domestic factors suggesting the positive role of recently undertaken Slovak economic reforms.

Keywords: small open economy; foreign shocks; monetary policy; Slovakia; euro area (search for similar items in EconPapers)
JEL-codes: E58 F41 F42 (search for similar items in EconPapers)
Pages: 23pages
Date: 2008-09, Revised 2008-09
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac, nep-opm and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: How Important Are Foreign Shocks in a Small Open Economy? The Case of Slovakia (2009)
Working Paper: How Important Are Foreign Shocks in Small Open Economy? The Case of Slovakia (2008)
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