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The impact of euro Area monetary policy on Central and Eastern Europe

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Abstract This paper investigates the effects of a euro area monetary policy shock on Central, Eastern, and Southeastern Europe (CESEE). We use shadow rates as a proxy for the monetary… Click to show full abstract

Abstract This paper investigates the effects of a euro area monetary policy shock on Central, Eastern, and Southeastern Europe (CESEE). We use shadow rates as a proxy for the monetary policy stance and propose a novel way of treating euro area countries in a multi-country framework. More specifically, our approach allows to place sign restrictions on both euro area aggregate and single member states’ quantities. This procedure fully takes cross-country heterogeneity within the euro area into account and leads to shocks that are economically consistent between both layers of aggregation. Our results show that prices and output fall in response to the euro area monetary tightening, both within the euro area and the CESEE region but to a varying degree. The revealed cross-country heterogeneity in the size of the effects emphasizes the usefulness and importance of our empirical approach.

Keywords: central eastern; monetary policy; area; euro area; area monetary

Journal Title: Journal of Policy Modeling
Year Published: 2020

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