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How far does monetary policy reach? Evidence from factor-augmented vector autoregressions for Poland

Mariusz Kapuściński

No 273, NBP Working Papers from Narodowy Bank Polski, Economic Research Department

Abstract: This study applies factor-augmented vector autoregressions to identify the effects of monetary policy shocks in a small, open, emerging market economy. It uses data on 132 variables for Poland, ‘compressing’ them to either structural (having an economic interpretation) or economically uninterpretable factors, also known as diffusion indices. The tightening of monetary policy is found to have broad, contractionary effects. Among other things, production, building permits, retail trade, employment, job offers, prices, wages, loans and stock prices decrease, unemployment and non-performing loans increase. However, a rise in the interest rate does not appear to be associated with an appreciation of the exchange rate. But this result is not robust among studies using vector autoregressions, which calls for a different strategy to identify the causal effect. As one of extensions, the effects of changes in global and foreign factors are investigated. Domestic prices are found to respond to global prices of commodities and foreign prices. Domestic production and interest rates – to their foreign counterparts.

Keywords: factor analysis; vector autoregressions; factor-augmented vector autoregressions; high-frequency identification; monetary transmission mechanism (search for similar items in EconPapers)
JEL-codes: C38 C32 E43 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-mon and nep-tra
Date: 2017
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Handle: RePEc:nbp:nbpmis:273