Transmission Mechanism of Monetary Policy in Central and Eastern Europe

Abstract

As more central banks across Central and Eastern Europe (CEE) move towards inflation control – either in the form of direct inflation targeting or indirectly through informal targets – good knowledge of transmission mechanism in the economy becomes crucial for implementing good policies. So far the volume of studies in the region devoted to this issue is not overly impressive. There have been no attempts made to study the issue in a comparative context of several economies.

The purpose of this study is to review the existing literature on transmission mechanism in CEE and put it in a broader context of the problems related to research on monetary policy. Also, we attempted to conduct empirical analysis for 10 transition economies using analogous methodology for the same sample period 1995-2000. In this comparative framework a series of Granger causality tests and impulse response analysis were carried out to asses the strength of two major transmission channels: interest rate and exchange rate channel. Also in the empirical part, we tried to look for the existence of long-run relationships between the basic set of macroeconomic variables in the countries under investigation.