The Impact of the Key Rate on Inflation and GDP: the Case of the Czech Republic

This master thesis is aimed to estimate the effects of monetary policy in the Czech Republic on the output and prices. The literature review in the field showed that the usual difficulty in answering this question is the endogeneity of the monetary policy rate. Authors propose various methods leading to the ambiguous results. This thesis uses the narrative approach of Romer and Romer (2004) as an identification strategy. Based on the data from the Czech National Bank for the period of 2008-2022, a new measure of monetary policy shocks exogenous to the macroeconomic variables was constructed. Using this new measure in VAR models, this paper estimates the impact of monetary policy on output and prices. The results show that monetary restriction in the Czech Republic leads to the output contraction of 1 percent in the short-run and the price level reduction of 0.8 percent in the medium-run. These results are supported with the series of robustness checks and evidence from the publications of other authors. The thesis contribution is three-fold. It applies the narrative approach to the Czech data and provide a novel estimation of the exogenous monetary policy shocks. It resolves the price puzzle present in some previous papers written on the Czech data and offers the explanation for it. In addition, the thesis contributes the broader field of empirical estimation of the monetary policy effects, confirming the theoretical predictions that the monetary policy affects output in the short run and price level in the middle run.