Modeling Monetary Policy Transmission in Acceding Countries: Vector Autoregression Versus Structural Vector Autoregression

Abstract

Using the vector autoregressive methodology, we present estimates of monetary transmission for five new EU member countries in Central and Eastern Europe with more or less flexible exchange rates. We select sample periods to estimate over the longest possible period that can be considered as a single monetary policy regime. To identify the vector autoregression (VAR), structural restrictions and the widely used Cholesky ordering are employed. We conclude that the structural VAR yields much better results. Fewer countries suffer from a price puzzle (i.e., an increase in prices following a monetary contraction). Our results also indicate that there are substantial differences in monetary transmission across the countries in our sample.

Monetary policy transmission: the case of Lithuania

“…We assume it takes some time for the macroeconomic variables (in the euro area as well as in Lithuania) to react to the interest rate changes; therefore, they are restricted not to react to Euribor changes during the same quarter when the monetary policy shock is observed. The identifying restrictions in our analysis are similar to, for example, Errit and Uusküla (2014), Elbourne and de Haan (2009), Minea and Rault (2009), Peersman and Smets (2001 and Marcellino (2004). Having the estimates of the reduced form VAR (model (1)), we consider a structural VAR model:…”

The Impact of Oil Price Shocks on Macroeconomic Activity: Searching Evidence from Oil Exporting and Importing Countries using Unstructured Vector Autoregressive (VAR) Model

“…Ayadi (2005); Obioma and Eke (2015) state that VAR model enables researchers to understand better the interrelationships between economic variables. The Cholesky decomposition is used to identify a VAR and implies a particular ordering of the variables in the VAR model (Elbourne & de Haan, 2009). The variables in this paper follows this sequence: (a) the log of oil prices; (b) the log gdp; (c) the log of the CPI index (d) the log of the interbank interest rate; (e) the log of stock market returns.…”

“…This question the strength of the VAR model, as the orthogonalisation involves "the subjective specification of a structural model in the errors" (Swanson & Granger, 1997). Also, it is argued by Elbourne and de Haan (2009) that the Cholesky decomposition approach is constrained, as it allows "only one direction of contemporaneous causation" Furthermore, Stock and Watson (2012) argue that the VAR models which include two or three variables are not sturdy and fail to predict the outcome in future. Also, Kormilitsina (2011) argues that the VAR model is not suitable for policy experiments because it violates the Lucas critique.…”

Monetary Policy Transmission and the Labour Market in the Non‑eurozone Visegrad Group Countries in 2000–2014. Evidence from a SVAR Analysis

“…In this respect we follow the strategy undertaken in numerous studies concerning the monetary transmission mechanism, such as Kim and Roubini (2000), Peersman (2004), Elbourne and de Haan (2009), Anzuini and Levy (2007), Łyziak et al (2008), among others. In order to strengthen the results presented below and the robustness of our analyses, we also present impulse responses coming from models in which data were detrended through the use of Hodrick-Prescott filter (with λ=129600).…”