Work detail

Independence and Transmission of Monetary Policy in Small Open Economies: The Case of Canada and the Czech Republic

Author: Bc. Jan Budinský
Year: 2022 - summer
Leaders: prof. PhDr. Tomáš Havránek Ph.D.
Consultants:
Work type: Bachelors
Language: English
Pages: 73
Awards and prizes:
Link: https://dspace.cuni.cz/handle/20.500.11956/173507
Abstract: The question of whether a small open economy (SOE) with highly integrated financial markets
can shield itself from the influence of foreign monetary policy and preserve its monetary
independence has been the subject of extensive research over the last decades. The growing
integration of world economies owing to globalization, the impacts of recent global pandemic
on them leading to the use of unconventional monetary policies, and the consequent high levels
of inflation across the globe have highlighted the importance of further study of this
problematic. This thesis focuses on two small open economies from different currency areas,
Canada and the Czech Republic, and evaluates the monetary policies of their central banks,
concentrating primarily on their independence, secondarily on the transmission mechanism of
the respective policies, and also on their foreign exchange reserves. A comparative analysis of
these two countries and their monetary policies on such scale and complexity has not yet been
made before. The results of cointegration testing of vector autoregression models consisting of
three-month interbank interest rates representing the monetary policies of the countries under
investigation revealed that both Canada and the Czech Republic exhibited a considerable degree
of monetary independence from adjacent currency blocs, i.e. from the US and the euro area,
respectively, in the period 01/2001-02/2022. This finding has a number of important
implications for both countries, the most relevant of which are also discussed in this thesis.
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