RESPONSES TO MONETARY

POLICY AND FINANCIAL SHOCKS

IN NON-EURO AREA CESEE

COUNTRIES

Laurence BooneOECD Chief Economist

8th ECB Conference on Central, Eastern and South-Eastern European (CESEE) Countries

ECB, 12 June 2019

• Monetary policy transmission through trade and financial integration: What does theory suggest?

• Empirical evidence on co-movements and spillovers for financial variables and real activity

• Policy levers when tensions appear between monetary policy, financial conditions and the economic position

2

Key questions

Nominal exchange rates, floating but

have been relatively stable

3

Nominal euro exchange rate, index Jan 2012=100

Note: According to the IMF de-facto classification of exchange rate regime in 2017, the Czech Republic maintained a soft

peg (stabilised agreement) with the euro, Poland had a free floating regime and Hungary had a floating regime.

Source: OECD database.

Depreciation

Appreciation

4

The euro is the primary invoicing currency for

CESEE exports

A. Invoicing currencies of exports B. Invoicing currencies of imports

Note: Extra-EU merchandise trade by invoicing currency in 2018.

Source: Eurostat.

0 20 40 60 80 100

HUN

POL

ROU

CZE

BGR

CHE

DNK

NOR

GBR

SWE

Euro area United States

Source: IMF Coordinated Portfolio Investment Survey; IMF Coordinated Direct Investment Survey; and OECD

calculations.

CESEE countries have significant financial

linkages with the euro area

5

Stock of portfolio liabilities (debt securities and equity) vis-à-vis the EA and the USA, % of total portfolio liabilities

0.0

0.2

0.4

0.6

0.8

1.0

AEs EA EMEs DNK NOR CHE GBR SWE HUN CZE POL

Global Regional Country-specific

Note: Results for country groups (AEs, EA and EMEs) refer to the averages for relevant countries. Factors are estimated in a

dynamic two-factor model (global and regional) at annual frequency with one lag. For European countries, the regional factor refers

to mostly European (both advanced and emerging market) economies. Bond yields are first differenced to ensure stationarity.

Estimations for 42 countries over 2010-17.

Source: Maravalle and Rawdanowicz (2018), “Changes in Economic and Financial Synchronisation: A Global .Factor Analysis”,

OECD Economics Department Working Papers, No. 1517.

Changes in CESEE government bond yields are

strongly affected by the European regional factor

6

Contribution of factors to the variance of 10y government bond yields, as a share

Changes in CESEE equity prices are also

strongly affected by the European regional factor

7

Contribution of factors to the variance of equity prices, as a share

0.0

0.2

0.4

0.6

0.8

1.0

EA EMEs AEs CHE SWE DNK NOR GBR CZE HUN POL

Global Regional Country-specificNote: Results for country groups (EA, EMEs and AEs) refer to the averages for relevant countries. Factors are estimated in a

dynamic two-factor model (global and regional) at annual frequency with one lag. For European countries, the regional factor refers

to mostly European (both advanced and emerging market) economies. A percentage change is applied to equity prices to ensure

stationarity. Estimations for 42 countries over 2010-17.

Source: Maravalle and Rawdanowicz (2018), “Changes in Economic and Financial Synchronisation: A Global .Factor Analysis”,

OECD Economics Department Working Papers, No. 1517.

0.0

0.2

0.4

0.6

0.8

1.0

EA AEs EMEs DNK GBR SWE NOR CHE POL HUN CZE

Global Regional Country-specific

Note: Results for country groups (EA, AEs and EMEs) refer to the averages for relevant countries. Factors are estimated in a

dynamic two-factor model (global and regional) at annual frequency with one lag. For European countries, the regional factor refers

to mostly European (both advanced and emerging market) economies. Estimations for 42 countries over 2010-17, using growth rates

of headline CPI.

Source: Maravalle and Rawdanowicz (2018), “Changes in Economic and Financial Synchronisation: A Global .Factor Analysis”,

OECD Economics Department Working Papers, No. 1517.

Fluctuations in CESEE domestic inflation

are dominated by the global factor

8

Contribution of factors to the variance of CPI, as a share

9

Changes in CESEE GDP growth are strongly

affected by the European regional factor

Contribution of factors to the variance of real GDP growth, as a share

0.0

0.2

0.4

0.6

0.8

1.0

EA EMEs AEs CHE SWE DNK NOR GBR CZE HUN POL

Global Regional Country-specificNote: Results for country groups (EA, EMEs and AEs) refer to the averages for relevant countries. Factors are estimated in a

dynamic two-factor model (global and regional) at annual frequency with one lag. For European countries, the regional factor refers

to mostly European (both advanced and emerging market) economies. Estimations for 42 countries over 2010-17, using GDP growth

rates.

Source: Maravalle and Rawdanowicz (2018), “Changes in Economic and Financial Synchronisation: A Global .Factor Analysis”,

OECD Economics Department Working Papers, No. 1517.

Shocks to the euro area interest rate tend to have

significant effects on CESEE countries, financial and real

10

Czech Republic

Impulse response function to a one-standard deviation positive

shock to the euro area short-term interest rates

Short-term interest rate, Equity prices, Real GDP growth,

basis points % %

Note: Impulse response function to a one-standard deviation positive shock to the euro area short-term interest rate (i.e.

easier financial conditions) based on the estimated large-scaled Bayesian VAR model (4 global variables, 5 euro area

variables & 10 domestic variables) containing key macroeconomic and financial variables. Estimation sample is 1999-

2018 for Hungary, 2000-2018 for the Czech Republic and 2001-2018 for Poland, all at quarterly frequency.

Source: OECD calculations

-8

-4

0

4

8

-8

-4

0

4

8

5 10 15 20

quarters

0

1

2

3

0

1

2

3

5 10 15 20

quarters

-.2

-.1

.0

.1

.2

.3

.4

-.2

-.1

.0

.1

.2

.3

.4

5 10 15 20

quarters

Source: OECD Economic Outlook 105 database.

Short-term CESEE interest rate have been less

responsive to domestic conditions recently

11

0

1

2

3

4

5

-1 0 1 2 3 4 5

(2005,2014)

(2015,2018)

Core inflation

Sh

ort

-te

rm i

nte

res

t ra

te

Czech Republic

1

2

3

4

5

6

7

-0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0

(2005,2014)

(2015,2018)

Core inflation

Poland

-2

0

2

4

6

8

10

12

0 1 2 3 4 5 6 7

(2005,2014)

(2015,2018)

Core inflation

Hungary

12

The fiscal stance is pro-cyclical (too lose)

in some CESEE countries

Change in the underlying primary balance

% of potential GDP

Source: OECD EO105 database; and OECD calculations.

• Strong evidence of transmission of monetary and financial conditions from the EMU to non-euro area CESEE countries

• Monetary policy is constrained, especially with stable exchange rates

• To the extent that the policy-mix may create domestic imbalances, there may be some scope to use fiscal policy in a more counter-cyclical way (tightening), thus helping with more gradual monetary tightening

13

Conclusion

Sources

14

ECOSCOPE blogOECD Economic Outlook

Note: Short-term rates are defined as the 3-month interbank offer rate.

Source: Refinitiv.

Evolution of interest rates in the euro area and

CESEE countries

15

B. 10-year government bond yields

-2

0

2

4

6

8

10

12

2012 2013 2014 2015 2016 2017 2018 2019

EA POL HUN CZE%

A. Short-term interest rates

-2

0

2

4

6

8

10

2012 2013 2014 2015 2016 2017 2018 2019

EA POL HUN CZE%

Source: European Commission.

European Structural Funds have a significant

impact on CESEE countries’ growth

16

Total estimated impulse of EISF to GDP growth over 2019-2020, compared to 2018 GDP