EXTERNAL INFORMATION AND MONETARY POLICY TRANSMISSION IN NEW EU MEMBER STATES: RESULTS FROM FAVAR MODELS

Zlatina Balabanova and Ralf Brüggemann

Macroeconomic Dynamics, 2017, vol. 21, issue 2, 311-335

Abstract: We investigate the effects of monetary policy shocks in the new European Union (EU) member states the 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 information from nonstationary factor time series. One set of VAR models includes factors obtained from a large cross section of time series from EMU countries, whereas another set includes factors obtained from other acceding countries. We find that including EMU factors does change impulse response patterns in some but not all acceding countries. In contrast, including factors from other acceding countries leads to substantial changes in impulse responses and to economically more plausible results. Overall, our analysis highlights that taking external economic developments properly into account is crucial for the analysis of monetary policy in the new EU member states.

Date: 2017
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