Transmission of Monetary Shocks in Latvia

Abstract

This study deals with short-term reactions of the economy to various monetary shocks. The analysis of the financial system of Latvia supports the view that the wealth channel is currently very weak or even non-existent due to a relatively underdeveloped capital market. The importance of various channels of monetary transmission has been tested empirically by using the structural VAR model and small structural macroeconomic model. The analysis provides evidence that monetary shocks are transmitted to the economy mainly through the exchange rate channel.monetary policy, monetary transmission mechanism, small structural model, vector autoregression