MONETARY POLICY TRANSMISSION MECHANISM IN EMERGING COUNTRIES

Abstract

The transmission channels of monetary policy are used by central banks to accomplish the main objective of price stability in the context of sustainable economic growth. The importance of interest rate and exchange rate channels for the emerging countries Romania, Poland, Czech Republic and Hungary is analyzed by using Bayesian VAR approach with Diffuse priors over 1998Q1-2012Q3. Main result of the empirical study is that both channels are effective for the monetary policy transmission mechanism in Hungary and Czech Republic. In Romania and Poland they do not exhibit puzzles, but the impact of the macroeconomic variables is not very significant and shows very high volatility. In the context of monetary integration, exchange rate channel will become irrelevant when these countries adopt Euro currency. This change will lead instead to a powerful interest rate channel.

Keywords

• Monetary policy
• Transmission mechanism
• Bayesian VAR approach
• Emerging countries
• Interest rate channel
• Exchange rate channel