Euro Dominance Hypothesis and Monetary Policy Independence the Czech Perspective

Abstract

In this article, we investigate the actual level of monetary policy independence in the Czech Republic. We formulate the research agenda in terms of the Euro Dominance Hypothesis. The situation of the non-euro EU countries with derogation in terms of joining the EMU, like the Czech Republic, is similar to the pre-euro situation of the euro area countries, in which the problem of the stability of the European Mechanism System was predominant. We investigate the co-movement of interest rates between the Czech Republic and the Eurozone to assess the potential costs of monetary integration. Using cointegration and VECM methods we show that the ECB monetary policy influences monetary policy in the Czech Republic and the actual level of monetary independence in the Czech Republic is much lower than it is presumed. Therefore, we argue that for the Czech Republic the cost of the joining the EMU will be lower than expected.

Actual monetary policy independence in a small open economy: the Polish perspective

“…The trend term relates to the expectations that Poland's participation in the EMU should manifest itself in long-run interest rate convergence. This should be observable in the long-run fall of the interest rate risk premium in Poland (as argued in Goczek and Mycielska 2016). These results in various specifications are summarised in Table 1.…”