Prague Economic Papers 2016, 25(6):655-670 | DOI: 10.18267/j.pep.584

Euro Dominance Hypothesis and Monetary Policy Independence the Czech Perspective

Łukasz Goczek1, Dagmara Mycielska2
1 Faculty of Economic Sciences, University of Warsaw, Warsaw, Poland (lgoczek@wne.uw.edu.pl)
2 Faculty of Economic Sciences, University of Warsaw, Warsaw, Poland (dmycielska@wne.uw.edu.pl)

In this article, we investigate the actual level of monetary policy independence in the Czech Republic. We formulate the research agenda in terms of the Euro Dominance Hypothesis. The situation of the non-euro EU countries with derogation in terms of joining the EMU, like the Czech Republic, is similar to the pre-euro situation of the euro area countries, in which the problem of the stability of the European Mechanism System was predominant. We investigate the co-movement of interest rates between the Czech Republic and the Eurozone to assess the potential costs of monetary integration. Using cointegration and VECM methods we show that the ECB monetary policy influences monetary policy in the Czech Republic and the actual level of monetary independence in the Czech Republic is much lower than it is presumed. Therefore, we argue that for the Czech Republic the cost of the joining the EMU will be lower than expected.

Keywords: cointegration, VECM, monetary policy, interest rates, the Czech Republic
JEL classification: C32, E43, E52, E58, F41, F42

Prepublished online: May 20, 2016; Published: December 1, 2016  Show citation

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Goczek, Ł., & Mycielska, D. (2016). Euro Dominance Hypothesis and Monetary Policy Independence the Czech Perspective. Prague Economic Papers, 25(6), 655-670. doi: 10.18267/j.pep.584
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