US and Euro Area Monetary Policies – What Are the Interrelationships
|Author:||Bc. Libor Ulrich|
|Year:||2017 - summer|
|Leaders:|| prof. Roman Horváth Ph.D.
|Work type:|| Bachelors
|Awards and prizes:|
|Abstract:||This thesis studies the nature of the interrelationships between the
United States and the euro area by examining the relative importance
of foreign and domestic monetary policy shocks. We estimate two
vector autoregression models using seven variables on a period running
from 1999 until 2016. These models differ only in the selection of
interest rates: the first model contains the standard interest rates,
while the other contains the Wu-Xia shadow rates in order to better
account for unconventional monetary policies at the zero lower bound.
We examine the magnitude and the persistence of interest rates
shocks using impulse response analysis. We subsequently focus our
attention on forecast error variance decompositions.
The results from both models indicate that monetary contractions lead
to decreases in economic activity and price level in consistence with
economic theory, with substantial evidence for mutual monetary policy
dependence given the cross-border spillovers indicated by the impulse
responses. Furthermore, using Wu-Xia shadow rates produces results
that indicate more persistent reactions of economic activity to interest
rate shocks, which is in accordance with the stated goals of
unconventional monetary policies to engender economic recovery after
the financial crisis.