Differences in the Responses to Monetary Policy Shocks before and after the EU Membership: Evidence from the Czech Republic

Abstract

The purpose of this thesis is to investigate differences in the effects before and after joining the European Union(EU) on economy to monetary policy shocks as a small open country. In this paper, the case of the Czech Republic is considered as the representative country. For comparison of the responses of macroeconomic variables for the data before and after the membership of the EU, whole data are divided by two based on the date when the Czech Republic became the member. By employing Structural Vector Autoregression(SVAR) model, this paper is trying to reveal the difference in the responses of major variables to monetary tightening shocks. As a result, significant exchange rate puzzles are found in the both. While the puzzles are robust in the results for pre-membership sample, those are not robust for the later sample. According to additional tests, the intervention of the central bank of the country in the foreign reserves market may cause the differences in the impacts of foreign reserves before and after the membership. Due to the dissimilarity, co-movement of impulse responses of NEER and FORE is only shown in the results for the earlier sample.