Monetary Transmission in the Czech Republic after the Transformation

This paper analyzes the transmission mechanisms of a contractionary monetary policy shock on the real economy. The sufficiently long regime uniform time period since the political transformation in the Czech Republic provides evidence for effective inflation targeting by the Czech National Bank. I apply a recursive vector autoregression (VAR), a structural VAR, and structural vector error correction model (SVECM). In the SVAR the restrictions imply a lagged effect of the monetary policy shock on output and prices in the short run, and money neutrality in the long-run. In the SVECM a money demand and an interest rate relationship identify the cointegrating vectors. The impulse responses of all models state a reduction of output and consumer prices after monetary tightening. The exchange rate overshoots its steady state level in the VAR and SVECM models, indicating a large degree of exchange rate volatility after the shock. The results reveal an interest pass-through from Czech monetary policy to inflation.