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

25 Pages Posted: 7 Dec 2008  

Roman Horvath

Charles University in Prague; IOS Regensburg; Université de Nice Sophia Antipolis - Groupe de Recherche en Droit, Economie et Gestion (GREDEG); University of Saint Etienne - Analysis Group and Economic Theory Lyon St-Etienne (GATE-LSE)

Date Written: September 4, 2008

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.

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

JEL Classification: E58, F41, F42

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: https://ssrn.com/abstract=1311491 or http://dx.doi.org/10.2139/ssrn.1311491

Roman Horvath (Contact Author)

Charles University in Prague ( email )

Celetn√° 13
Praha 1, 116 36
Czech Republic

IOS Regensburg

Landshuter Str. 4
Regensburg, 93047
Germany

Université de Nice Sophia Antipolis - Groupe de Recherche en Droit, Economie et Gestion (GREDEG)

250, rue Albert Einstein
Valbonne, 06560
France

University of Saint Etienne - Analysis Group and Economic Theory Lyon St-Etienne (GATE-LSE)

Lyon
France

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