Comparison of the Monetary Transmission Mechanisms of Czech Republic and Poland Using Impulse Response Functions

For the purpose of monetary policy analyses dynamic multivariate models are usually applied. The reason is the presence of significant lags between an action and the appropriate effects in the economy. We use the concept of structural VAR models, widely used approach next to the DSGE and simultaneous equations models. We estimate four and five variable VAR containing the key macroeconomic indicators and identify monetary transmission mechanism using SVAR. Using different identification schemes and impulse response functions we compare the effect of a restrictive monetary policy shock on the set of analysed variables, especially price level. We also compare the results of defined models for the Czech and Polish economies, that both intend to enter EMU. To avoid the possibility of a price puzzle effect, as a result of mixing policy regimes in the sample period, we use data from single monetary policy regime starting 1998, when the Czech central bank switched to the inflation targeting regime. The results indicate high sensitivity to the identification schemes in SVAR and not significant differences between responses to monetary policy shock in CR and Poland.

Keywords: monetary policy, transmission mechanism, impulse response functions, Cholesky decomposition, exogenous shock, identification, SVAR