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How Important are Foreign Shocks in Small Open Economy? The Case of Slovakia


Roman Horvath


Charles University in Prague and IOS

September 4, 2008

William Davidson Institute Working Paper No. 933

Abstract:     
In this paper, we provide evidence on the nature and the relative importance of domestic and foreign shocks in Slovak economy based on block-restriction vector autoregression model in 1999-2007. We document well-functioning monetary transmission mechanism in Slovakia. Subject to various sensitivity checks, we find that contractionary monetary policy shock has a temporary negative effect on the degree of economic activity and price level. We find that using output gap instead of GDP alleviates the price puzzle. In general, prices are driven mainly by foreign factors and the European Central Bank monetary policy shock on Slovak prices is more powerful than that of the National Bank of Slovakia. Slovak central bank interest rate policy seems to follow the ECB's interest rates. On the other hand, spectacular Slovak economic growth is primarily driven by domestic factors suggesting the positive role of recently undertaken Slovak economic reforms.

Number of Pages in PDF File: 25

Keywords: small open economy, foreign shocks, monetary policy, Slovakia, euro area

JEL Classification: E58, F41, F42

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Date posted: December 7, 2008  

Suggested Citation

Horvath, Roman, How Important are Foreign Shocks in Small Open Economy? The Case of Slovakia (September 4, 2008). William Davidson Institute Working Paper No. 933. Available at SSRN: http://ssrn.com/abstract=1311491 or http://dx.doi.org/10.2139/ssrn.1311491

Contact Information

Roman Horvath (Contact Author)
Charles University in Prague and IOS ( email )
Celetná 13
Praha 1, 116 36
Czech Republic
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