The Impact of Interest Rate Transmission Channel on the Prices Development in the Eurozone Countries

Abstract

The purpose of this article is to investigate the monetary policy interest rate channel capabilities to influence the inflation in individual Eurozone countries. As the differences among Eurozone countries still exist, the question is whether the common monetary policy can similarly control and influence the development of inflation and economic performance in the individual union’s countries. The reaction of inflation, product and exchange rate on 1% positive interest rate shock is examined via vector autoregression (VAR) model. We implement recursive Cholesky decomposition of variancecovariance matrix of model residuals. To estimate the model, we employ monthly data for period 2000M1-2019M7 consisting of 235 observations. VAR model allows computing impulse-response functions for estimation of interest rate pass-through to macroeconomic variables.