How Important Are Foreign Shocks In Small Open Economy? The Case Of Slovakia

In this paper, the authors provide evidence on the nature and the relative importance of domestic and foreign shocks in Slovak economy based on block-restriction vector autoregression model in 1999-2007. They document well-functioning monetary transmission mechanism in Slovakia. Subject to various sensitivity checks, they find that contractionary monetary policy shock has a temporary negative effect on the degree of economic activity and price level. They find that using output gap instead of GDP alleviates the price puzzle. In general, prices are driven mainly by foreign factors and the European Central Bank monetary policy shock on Slovak prices is more powerful than that of the National Bank of Slovakia.