International Transmission of Conventional and Unconventional Monetary Policy and Financial Stress Shocks from the Euro Area to Russia

Silvo Dajčman,Dejan Romih,Sergey Merzlyakov,Sergey E Pekarski,Alenka Kavkler

doi:10.2478/jcbtp-2022-0010

Abstract

Abstract This paper studies the international transmission of the euro area´s monetary policy and financial stress to Russia. The results show that financial stress in the euro area damages Russian economic activity and stock prices, but not its trade balance. The contractionary euro area monetary policy shock decreases Russian GDP, leads to real appreciation of the euro against the Russian rouble, damages Russian stock prices, but does not significantly affect the trade balance between countries. We also found that the Central Bank of the Russian Federation adjusts to monetary policy shocks in the euro area.

Highlights

It has recently been documented that increasing global trade and financial flows have made economies around the world more susceptible to monetary policy actions in advanced economies (Cushman & Zha, 1997; Koray & McMillin, 1999; Takáts & Vela, 2014; Vespignani, 2015; Rey, 2016; Bluwstein & Canova, 2016) and financial stress (Dovern & van Roye, 2014; Evgenidis & Tsagkanos, 2017; Chen & Semmler, 2018)
An ECBs unconventional monetary policy shock is identified by assuming that, in a particular month, the central bank evaluates that monthsindicators of the euro area economic activity, price dynamics, financial stability and the current level of its policy rate before taking any action that will have an impact on the size of Eurosystems balance sheet
While the existing literature does not analyse the impact of international monetary policy shocks on the bilateral trade balance between Russia and the euro area, our results indicate that conventional monetary policy does not significantly affect the bilateral trade balance

Summary

Introduction

It has recently been documented that increasing global trade and financial flows have made economies around the world more susceptible to monetary policy actions in advanced economies (Cushman & Zha, 1997; Koray & McMillin, 1999; Takáts & Vela, 2014; Vespignani, 2015; Rey, 2016; Bluwstein & Canova, 2016) and financial stress (Dovern & van Roye, 2014; Evgenidis & Tsagkanos, 2017; Chen & Semmler, 2018). With the onset of large-scale unconventional monetary policy operations, the focus has shifted away from international trade flows to international financial flows (Berge & Cao, 2014; Falagiarda, McQuade & Tirpák 2015; Chen, Filardo, He & Zhu, 2016; Bluwstein & Canova, 2016; Evgenidis, Philippas & Siriopoulos, 2019) Another strand of the literature has investigated international transmission of financial stress and its detrimental macroeconomic effects (Hakkio & Keeton, 2009; Gilchrist & Zakrajsek, 2012; Dovern & van Roye, 2014; Eickmeier & Ng, 2015; Dajčman, Kavkler, Mikek & Romih, 2020). These variables include economic activity (GDP), price level, monetary policy rate, bilateral trade with the euro area, the bilateral exchange rate, stock prices and government bonds yield

Literature review

Methodology

Findings

Conclusion