Business cycle dynamics under monetary policy shocks in emerging European economies

Abstract

This article examines the unique transmission mechanisms through which monetary policy shocks influence business cycle fluctuations in emerging European economies. The analysis highlights how the distinct structural features of these nations - including their bank-based financial systems, high degree of economic openness, and evolving policy credibility - shape the potency of conventional channels. While the interest rate channel operates, its effectiveness is mediated by the health and structure of the banking sector. The exchange rate channel is particularly forceful, often acting as a primary vector for transmitting monetary impulses to the real economy due to deep trade integration. Furthermore, the credit channel, encompassing both bank lending and balance sheet effects, is identified as a critical amplifier of policy shocks, often magnifying their impact on investment and consumption. The article also explores the role of central bank credibility and the significant influence of external monetary conditions, particularly from the eurozone, which can induce pro-cyclical policy stances. The findings underscore that the business cycle dynamics in these economies cannot be fully understood without appreciating this complex interplay of domestic financial structures and external monetary dependencies.