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

Published online by Cambridge University Press:  17 March 2016

Zlatina Balabanova  and
Ralf Brüggemann
Zlatina Balabanova
Affiliation:
University of Konstanz
Ralf Brüggemann*
Affiliation:
University of Konstanz
*
Address correspondence to: Ralf Brüggemann, Department of Economics, University of Konstanz, Box 129, 78457 Konstanz, Germany; e-mail: ralf.brueggemann@uni-konstanz.de.
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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.

Keywords

Factor-Augmented VARsImpulse-Response analysisMonetary Policy ShocksCentral and Eastern European CountriesEuropean Monetary Union
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 2 , March 2017 , pp. 311 - 335
Copyright
Copyright © Cambridge University Press 2016 

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Footnotes

We thank the associate editor and two anonymous referees for helpful suggestions. We also thank seminar participants at the 11th IWH-CIREQ Macroeconometric Workshop, the Freie Universität Berlin research seminar, and the ESEM 2012 for useful comments on earlier versions of this paper. Research assistance by Robin Braun and financial support by the Deutsche Forschungsgemeinschaft, Project BR 2941/1-1, is gratefully acknowledged.

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