The Evolution of the Monetary Policy Transmission Mechanisms of V4 Countries

Monetary policy measures cannot directly affect the economy. Their impact is usually indirect and mediated through various channels of monetary transmission. The choice of particular transmission mechanism is determined by several factors that include the specific conditions of each economy, the range of monetary tools that can be used by central bank as well as the various external factors. The paper explains the functioning of a monetary transmission in general, and then focuses on the particular types of transmission channels used by each of the central banks, chosen for analysis. The paper outlines the evolution of monetary policy transmission mechanisms in V4 countries from the beginning of the transformation process till present days. It compares the operational targets of V4’s monetary policies, their ultimate goals and the tools applied to achieve these goals. It also compares the common and distinct features of their respective monetary policies. As can be seen, these countries were mainly focusing on the maintaining of price and exchange rate stability at the beginning of the transformation process. Usually the double monetary objectives were used, and served as the nominal anchors to monetary policy. NBS, CNB, NBP used fixed exchange rates in order to establish the currency stability, and had been monitoring the evolution of the money supply for the price stability. MNB however could not apply this type of monetary strategy as a consequence of slightly different initial economic conditions. MNB therefore chose the exchange rate target as the primary target, and had been closely monitoring its evolution in the narrow fluctuation band. The gradual change of economic situation, brought about by the ongoing transformation process, resulted in the abandonment of the fixed exchange rate regime and the transition to more liberal regimes. This change was closely followed by the alternation of ultimate monetary policy goals that became solely oriented on the price stability. All of the analysed central banks adopted the regime of inflation targeting whether it was in its “pure” form as the explicit inflation targeting or in the form of so- called “inflation targeting lite”.