Spillover effects from euro area monetary policy across the EU: A factor-augmented VAR approach

No 2033, Kiel Working Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: I analyze spillover effects from Euro area monetary policy shocks to thirteen EU countries outside the Euro area, i.e., ten countries from Central and Eastern Europe (CEE) and three Western EU members. The analysis is based on a FAVAR model with two blocks which exploits a large cross-country data set covering real activity variables, prices and financial variables. An expansionary Euro area monetary policy shock raises production in most non-Euro area countries. Somewhat larger and more instantaneous responses of production are observed in small open economies with fixed exchange rate regimes, where foreign demand effects are particularly strong. In addition, a Euro area monetary expansion leads to declines in interest rates and reductions in uncertainty in most non-Euro area countries. The spillovers on uncertainty are more pronounced in economies with flexible exchange rates, where the degree of financial market openness tends to be higher and where exchange rate appreciations further enhance risk taking by cushioning debt burdens from foreign currency loans. Finally, spillover effects on prices are heterogeneous across countries and behave asymmetrically in most CEE countries.

Keywords: monetary policy; Euro area; Central and Eastern Europe; exchange rate regime; financial transmission; FAVAR (search for similar items in EconPapers)
JEL-codes: C33 E52 E58 F42 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkwp:2033

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