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Financial markets in CEE countries and their role in transmission of euro area monetary policy shocks

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  • Agata Wierzbowska

    (Graduate School of Economics, Kobe University)

Abstract

This paper uses the VAR methodology to analyse stock, bond, and exchange rate markets in six Central and Eastern European (CEE) countries. First, we study the influence of shocks occurring in each market on domestic economic conditions. Next, a counterfactual simulation analysis is carried out to discern the role of financial markets in the transmission of European Central Bank (ECB) monetary policy shocks into CEE economies. The results have implications for both present monetary policy-making and future euro adoptions, as well as for investors concerned with financial assets of CEE countries. While examining the estimated responses of domestic output and inflation to changes in stock, bond, and exchange rate prices, we draw conclusions on the relatively lower importance of the bond market and higher importance of stock and exchange rate markets in the economies. The study of transmission channels also points to stock markets as the main channel of transmission, especially in the case of transmission to the output. Transmission of monetary shocks to inflation takes place mainly through stock and exchange rate markets. There is also strong indication on considerable diversity across CEE countries taking place.

Suggested Citation

  • Agata Wierzbowska, 2015. "Financial markets in CEE countries and their role in transmission of euro area monetary policy shocks," European Journal of Business and Economics, Central Bohemia University, vol. 10(2), pages 7321:10-732, January.
    • Handle: RePEc:aad:ejbejj:v:10:y:2015:i:2:p:732
    DOI: 10.12955/ejbe.v10i2.732
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    More about this item

    Keywords

    Monetary transmission mechanismInternational transmission; Financial markets; VAR; Counter-factual simulation;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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