Publication detail

Interest Rates and Prices Causality in the Czech Republic - Granger Approach

POMĚNKOVÁ, J. KAPOUNEK, S.

Original Title

Interest Rates and Prices Causality in the Czech Republic - Granger Approach

Type

journal article in Web of Science

Language

English

Original Abstract

Monetary policy analysis concerns itself with both the assumptions of the transmission mechanism and the direction of causality between the nominal (i.e. the money) and real economy. The traditional channel of monetary policy implementation works via interest rate changes and their impact on the investment activity and the aggregate demand. Altering the relationship between the aggregate demand and supply then impacts the general price level and hence inflation. Alternatively, Post Keynesians postulate money as a residual, In their approach, banks extend credit in response to movements in investment activities and demand for money. In this paper authors use the VAR (i.e. the vector autoregressive) approach applied to the Taylor rule concept to identify the mechanism and impact of the monetary policy in the small open post transformation economy of the Czech Republic. The causality (in Granger sense) between the interest rate and prices in the Czech Republic is then identified. The two alternative modelling approaches are tested. First is the standard VAR analysis with lagged values of interest rate, inflation and economic growth as explanatory variables. This model shows the one way causality (in a Granger sense) between inflation rate and interest rate (i.e. the inflation rate is (Granger) caused by lagged interest rate). In second, the lead (instead of lagged) values of interest rate, inflation rate and real exchange rate are used. This estimate shows one way causality between inflation rate and interest rate in the sense that interest rate is caused by the lead (i.e. the expected future) inflation rate. The assumptions based on the money as a residual of the economic process were rejected in both models.

Keywords

exogenous and endogenous money, transmission mechanism, Taylor rule

Authors

POMĚNKOVÁ, J.; KAPOUNEK, S.

Released

21. 4. 2009

Publisher

VŠE Praha

Location

Praha

ISBN

0139-570X

Periodical

Agricultural Economics (AGRICECON)

Year of study

55

Number

7

State

Czech Republic

Pages from

347

Pages to

356

Pages count

10

URL

https://agricecon.agriculturejournals.cz/artkey/age-200907-0006_interest-rates-and-prices-causality-in-the-czech-republic-granger-approach.php

BibTex

@article{BUT114192,
  author="Jitka {Dluhá} and Svatopluk {Kapounek}",
  title="Interest Rates and Prices Causality in the Czech Republic - Granger Approach",
  journal="Agricultural Economics (AGRICECON)",
  year="2009",
  volume="55",
  number="7",
  pages="347--356",
  doi="10.17221/2/2009-AGRICECON",
  issn="0139-570X",
  url="https://agricecon.agriculturejournals.cz/artkey/age-200907-0006_interest-rates-and-prices-causality-in-the-czech-republic-granger-approach.php"
}