Who's Afraid of Euro Area Monetary Tightening? Cesee Shouldn't

37 Pages Posted: 26 May 2020

See all articles by André Geis

André Geis

European Central Bank (ECB)

Isabella Moder

European Central Bank (ECB)

Tobias Schuler

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Date Written: May, 2020

Abstract

After a first phasing out of the ECB’s net asset purchases at end-2018, the question of how a future tightening of the ECB’s monetary policy may affect countries located in the vicinity of the euro area has gained prominence, but has been left largely unanswered so far. Our paper aims to close this gap for the CESEE region by employing shock-specific conditional forecasts, a methodology that has been little exploited in this context. Besides demonstrating the usefulness of our framework, we obtain three key findings characterising the spillovers of ECB monetary policy to CESEE economies: first, a euro area monetary tightening does trigger sizeable spillovers to the CESEE region. Second, we show that in the context of a demand shock-induced monetary tightening, which is more realistic than the usual approach taken in the literature, CESEE countries’ output and prices actually respond positively. Third, spillovers on output and prices in CESEE countries are heterogeneous, and depend on the trajectory of euro area tightening.

Keywords: BVAR, EU integration, international shock transmission, monetary policy

JEL Classification: C11, C32, E52, F42

Suggested Citation

Geis, André and Moder, Isabella and Schuler, Tobias, Who's Afraid of Euro Area Monetary Tightening? Cesee Shouldn't (May, 2020). ECB Working Paper No. 20202416, Available at SSRN: https://ssrn.com/abstract=3610734 or http://dx.doi.org/10.2139/ssrn.3610734

André Geis (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Isabella Moder

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Tobias Schuler

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

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