Monetary Policy of the ECB and its Spillover Effects to Central and Eastern Europe. Rolling Window VAR Approach

Abstract This paper investigates the impact of the monetary policy of the European Central Bank (ECB) on economic activity in the euro area, as measured by industrial production, and price developments, as well as the spillover effects of this policy to three Central and Eastern Europe Countries: Czechia, Hungary, and Poland for the period 2000–2023 (CEE-3). The method of principal component analysis is employed to account for the bank’s overall monetary policy stance and to disentangle the main factors driving the macroeconomic situation. In particular, two main factors are identified. The first pertains to the conventional monetary policy of the ECB, and the second represents its non-standard measures. Moreover, the overall monetary conditions index is calculated. Next, the use of the vector autoregression technique shows that the ECB’s monetary policy exerted a significant impact on euro area inflation, while the impact on industrial production was less pronounced. The results also indicate that the ECB’s monetary policy exerted some significant international spillovers. Nonetheless, they varied with regard to time (as indicated by rolling window analysis), countries, and macroeconomic variables affected.