A Change in Volatility or Asymmetry? A Monetary Transmission Mechanism in Small Open European Economies during the Financial Crisis

Przemysław Włodarczyk

doi:10.18778/1508-2008.28.33

Authors

Przemysław Włodarczyk University of Lodz, Department of Economic Policy, Faculty of Economics and Sociology https://orcid.org/0000-0003-1316-6328

DOI:

https://doi.org/10.18778/1508-2008.28.33

Keywords:

monetary transmission mechanism, economic crisis, small open economy, Markov Switching Bayesian Structural Vector Autoregression (MSBSVAR)

Abstract

The article analyses the influence of crisis-induced changes in economic activity on the monetary transmission mechanism in the small open economies of Czechia, Hungary, Poland, and Sweden from 2000: 1 to 2016: 5 using the Markov Switching Structural Bayesian Vector Autoregressive models. The results confirm that in countries where the exchange rate transmission channel is relatively weak (Hungary and Sweden), changes in volatilities coincide with changes in the coefficients of the monetary transmission mechanism, reducing the efficiency of a monetary policy during a crisis. The changes of the coefficients occurred in neither Poland nor Czechia, where the exchange rate pass-through was not closed completely. The results imply that in small open economies, public authorities’ efforts to sustain exchange rate pass-through may critically affect their ability to retain monetary control during a crisis.

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