Single Monetary Policy versus Macroeconomic Fundamentals in Slovakia
Single Monetary Policy versus Macroeconomic Fundamentals in Slovakia

Summary/Abstract: After introduction of Euro since January 2009 the Slovak Republic does not perform its independent monetary policy but is affected by the Euro area policy including common interest rates. Interbank interest rate is considered as a proxy-variable aggregating overall monetary policy setting. The objective of the paper is to evaluate compatibility of the Euro area interest rates with macroeconomic situation in Slovakia. In other words, the key question is whether common interest rates respond sufficiently to inflation gap, output gap or other indicators. Reaction function is estimated via linear regression with the Newey-West approach for the pre-Euro period as well as Euro period in the Slovak Republic. Results demonstrate that the Euro area interbank interest rates did not react sufficiently neither to Slovak inflation nor output gap. These led to extremely low inflation during last month approaching the critical point of deflation with possible negative impacts on Slovak economy.

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