FED vs. ECB: Which matters most for Visegrad economies? Evidence from a Bayesian VAR model

This paper employs a VAR model with economically meaningful structural restrictions to examine how monetary policy shocks originating from the FED and the ECB influence macroeconomic variables in Central European economies, specifically the Visegrad Group (V4). We investigate whether US monetary policy shocks impact the V4 independently or primarily through Germany. Our results indicate that US monetary policy shocks significantly affect V4 macroeconomic variables, at times equalling or surpassing the influence exerted by their European counterparts, even after accounting for indirect effects transmitted through Germany. Additionally, our findings highlight the dominance of the income absorption effect, leading to output contractions in these small open economies.