International Spillovers from Euro Area Monetary Policy to Advanced Small Open Economies: Investment Behavior of Czech Firms

Volha Audzei and Michal Franta

Working Papers from Czech National Bank, Research and Statistics Department

Abstract: The paper examines international spillovers of euro area (EA) monetary policy to the real economy of an advanced small open economy with a high degree of credit euroization and close trade links with the EA. We focus on Czechia, as it has a similar degree of trade and financial integration with the EA as the rest of the non-EA countries in the region. Based on firm-level data and high-frequency identified monetary policy shocks, we assess the channels of EA monetary policy spillovers. More precisely, we estimate the responses of investment by Czech firms to EA monetary policy shocks using panel local projections and compare the responses for various groups of firms. The results suggest the presence of the trade channel of spillover transmission. Some evidence is found for the balance sheet channel. The foreign currency borrowing cost channel is detected after 2014, suggesting that the high degree of credit euroization in Czechia has altered the transmission of spillovers of EA monetary policy. Importantly, the overall spillovers from the EA have weakened significantly since 2014.

Keywords: Credit euroization; Investment of firms; Small open economy; Transmission channels (search for similar items in EconPapers)
JEL-codes: C23 D22 E52 F41 (search for similar items in EconPapers)
Date: 2026-03
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