7/2013 Gertrud Errit and Lenno Uusküla. Euro area monetary policy transmission in Estonia

Working Papers of Eesti Pank No. 7/2013

Published in Baltic Journal of Economics, 2015, 1(14)

This paper studies the effect of a monetary policy shock in the euro area on the main Estonian economic and financial variables between 2000 and 2012. Using a standard structural vector autoregression (SVAR) model we find strong and persistent effects on Estonian GDP, private consumption, corporate investment and imports. A monetary policy shock has also strong and sluggish effects on the housing loan and consumer credit interest rates. The estimated reaction of Estonian GDP and the GDP deflator-based inflation rate is about four times stronger than the reaction of euro area-wide aggregates. The Estonian money market interest rate (the 3-month Talibor) reacts about twice as strongly as the euro area money market interest rate (the 3-month Euribor). We also show that this finding is sensitive to the inclusion of the data from the years of the recent financial and economic crisis. We conjecture that household interest rates can play an important role in propagating monetary policy shocks in Estonia.

JEL Code: E32, E52, C32

Keywords: monetary policy, SVAR, Estonia, euro area

Authors’ e-mail addresses: gertrud.errit [at] eestipank.ee, lenno.uuskyla [at] eestipank.ee

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The opinions expressed in this paper are solely those of the authors and do not necessarily reflect the views of Eesti Pank.