Monetary Transmission in the New EU Member States: Evidence from Time-Varying Coefficient Vector Autoregression

This paper studies the transmission of monetary policy in selected new EU Member States with structural time-varying coeffi cient vector autoregressions in comparison with that in the euro area. In line with the Lucas Critique, reduced-form models, like standard vector autoregressions (VARs), are not invariant to changes in policy regimes. Many of the new members of the EU have experienced changes in monetary policy regimes, which calls for the use of a time-varying parameter analysis. Our results indicate that some parameters change signifi cantly, altering the shape of the impulse response functions. Monetary policy is most powerful in Poland and comparable in strength to that in the euro area and is least powerful in Hungary, while the strength of monetary policy in the Czech Republic lies in between. We explain these results by the credibility of monetary policy and openness.