The article provides empirical evidence on the effects of monetary policy shocks in the three largest new European Union (EU) economies: Czech Republic, Hungary and Poland. Vector autoregression (VAR) system estimates show that the co-movement of macroeconomic variables, conditional on a monetary policy shock, is similar across these countries and, despite their lower degree of financial development, not dissimilar to that found for more advanced European economies. While qualitatively similar to the responses observed in the old EU members, the responses of the new members are, on average, weaker.
Carry trades-popular strategies in the foreign exchange market-are long positions in high interest rate currencies financed through funds borrowed from low interest rate currencies. It has been shown for a number of bilateral exchange rates vis-à-vis the US dollar that shocks to interest rate differentials foster carry trade activity and lead to significant changes in the foreign exchange level. This paper considers which (or which combination of) structural shocks can be consistent with the implications of such an interest rate differential shock that has been identified in previous studies. It is especially demand and confidence shocks, rather than supply or monetary policy shocks, which are found to generate effects similar to those produced by an unexpected widening of the interest rate differential and overall lead to longer-term gains from carry trade activity. Also provided is a measure of the potential gain/losses experienced by the actual positioning of market participants in the foreign exchange futures and conditional on the knowledge of the macroeconomic shock that occurred at the time of positioning.
Economic uncertainty is an important factor behind macroeconomic fluctuations: in an uncertain environment, firms reduce hiring and investment, financial intermediaries are more reluctant to lend and households increase their propensity to save. In the present paper, we study the effects of the uncertainty which arises from fiscal policy decisions. We propose a new measure of fiscal policy uncertainty (FPU). In particular, we estimate a fiscal reaction function, allowing the volatility of the shocks to be time-varying. The time series of this volatility is our proxy for FPU. Looking at Italian data over the period 1981-2014, we find that an unexpected increase in our FPU measure has a negative impact on the economy. One implication of this result is that the same change in the government budget can have different effects depending on whether it is associated with a reduction or an increase in FPU. Therefore, the neglect of FPU may partly explain why the size (and sign) of fiscal multipliers differs so much across existing empirical studies.
Economic uncertainty is an important factor behind macroeconomic fluctuations: in an uncertain environment, firms reduce hiring and investment, financial intermediaries are more reluctant to lend and households increase their propensity to save. In the present paper, we study the effects of the uncertainty which arises from fiscal policy decisions. We propose a new measure of fiscal policy uncertainty (FPU). In particular, we estimate a fiscal reaction function, allowing the volatility of the shocks to be time-varying. The time series of this volatility is our proxy for FPU. Looking at Italian data over the period 1981-2014, we find that an unexpected increase in our FPU measure has a negative impact on the economy. One implication of this result is that the same change in the government budget can have different effects depending on whether it is associated with a reduction or an increase in FPU. Therefore, the neglect of FPU may partly explain why the size (and sign) of fiscal multipliers differs so much across existing empirical studies.
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