The Basic Transmision Mechanisms of Monetary Policy in the Czech Republic

This paper deals with two basic transmission mechanisms of monetary policy in the Czech Republic which are derived from trivial paradigms of economic theory: traditional Keynesianism and monetarism. The effectiveness of different transmission channels in the Czech economy is considered after defining the transmissions. The correlation analysis of time series is executed, reflecting the development of the most common monetary policy instruments, economic consequences including main objectives of the stabilization policy with respect to the Keynesian and monetarist theories. Specifically, the repo rate of the Czech National Bank, 1M PRIBOR, long-term interest rate, gross domestic product and consumer price index are used in the case of the traditional Keynesian transmission. The transmission of the monetarist approach – except the main targets of the stabilization policy (GDP and CPI) and the repo rate – reflects monetary base and monetary aggregate M2. If the theses of the causality of these transmissions are accepted, the identified correlation coefficients can determine the importance of the traditional channels. Problems of time-lag are solved by shifts in time series by up to two years (eight quarters). For the purpose of the correlation analysis, we use quarterly data from the first quarter of 1998 to the third quarter of 2010. Finally, analysis results are interpreted and assessed based upon the critique of the current macroeconomics and economic practice of the CNB.