External Information and Monetary Policy Transmission in New EU Member States: Results from FAVAR Models

Zlatina Balabanova (zlatina.balabanova@uni-konstanz.de) and Ralf Brüggemann
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Zlatina Balabanova: Department of Economics, University of Konstanz, Germany

No 2012-05, Working Paper Series of the Department of Economics, University of Konstanz from Department of Economics, University of Konstanz

Abstract: We investigate the e_ects of monetary policy shocks in the new European Union member states Czech Republic, Hungary, Poland and Slovakia. In contrast to existing studies, we explicitly account for external developments in European Monetary Union (EMU) countries and in other acceding countries. We do so by using factor-augmented vector-autoregressive models that employ the information from non-stationary factor time series. One set of VAR models includes factors obtained from a large cross-section of time series from EMU countries, while another set includes factors obtained from other acceding countries. We use cohesion analysis to facilitate the interpretation of the different factor time series. We find that including the EMU factors does not greatly affect the impulse response patterns in acceding countries. In contrast, including factors from other accession countries leads to substantial changes in impulse responses and to economically more plausible results. Overall, our analysis highlights that taking into account external economic developments properly is crucial for the analysis of monetary policy in the new EU member states.

Keywords: Factor-augmented VARs; impulse-response analysis; monetary policy shocks; central and eastern European countries; European monetary union (search for similar items in EconPapers)
JEL-codes: C32 C38 C50 E52 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2012-03-27
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mon and nep-tra
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Citations: View citations in EconPapers (3)

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