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<p>This paper examines the transmission of euro-area monetary policy shocks to six Western Balkan economies—Albania, Bosnia and Herzegovina, Croatia, Montenegro, North Macedonia, and Serbia—using a hierarchical Bayesian panel VAR framework. By combining country-specific dynamics with cross-country information pooling, the model quantifies external monetary spillovers in a region characterized by institutional heterogeneity and deep financial integration with the euro area. Monetary shocks are identified as exogenous innovations to Euribor and evaluated under both temporary and persistent shock structures. The results indicate that a one-percentage-point Euribor tightening generates an immediate increase in domestic interest rates, a short-run contraction in output, a persistent disinflationary response, and a decline in credit growth. The dynamic responses are consistent with a prominent role for the interest-rate and bank-lending channels, with the strongest and most persistent effects observed in currency board and euroized economies. Robustness exercises based on alternative monetary policy indicators, including the Wu–Xia shadow rate and a composite shadow rate–deposit facility rate measure incorporating the 2022–2025 ECB tightening cycle, yield qualitatively similar results. Additional specifications incorporating nominal effective exchange rates and excluding Croatia’s post-euro-adoption period leave the main conclusions largely unchanged, indicating that the estimated transmission mechanism is stable across alternative policy measures, exchange-rate specifications, and sample definitions. The findings underscore the limited insulation of small open economies from external monetary cycles.</p>

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ECB monetary policy spillovers in small open economies: evidence from a hierarchical Bayesian panel VAR for a sample of Western Balkan countries

  • 期刊论文

  • 发表日期：

    2026年7月29日

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  • Dejan Kovacevic

摘要

This paper examines the transmission of euro-area monetary policy shocks to six Western Balkan economies—Albania, Bosnia and Herzegovina, Croatia, Montenegro, North Macedonia, and Serbia—using a hierarchical Bayesian panel VAR framework. By combining country-specific dynamics with cross-country information pooling, the model quantifies external monetary spillovers in a region characterized by institutional heterogeneity and deep financial integration with the euro area. Monetary shocks are identified as exogenous innovations to Euribor and evaluated under both temporary and persistent shock structures. The results indicate that a one-percentage-point Euribor tightening generates an immediate increase in domestic interest rates, a short-run contraction in output, a persistent disinflationary response, and a decline in credit growth. The dynamic responses are consistent with a prominent role for the interest-rate and bank-lending channels, with the strongest and most persistent effects observed in currency board and euroized economies. Robustness exercises based on alternative monetary policy indicators, including the Wu–Xia shadow rate and a composite shadow rate–deposit facility rate measure incorporating the 2022–2025 ECB tightening cycle, yield qualitatively similar results. Additional specifications incorporating nominal effective exchange rates and excluding Croatia’s post-euro-adoption period leave the main conclusions largely unchanged, indicating that the estimated transmission mechanism is stable across alternative policy measures, exchange-rate specifications, and sample definitions. The findings underscore the limited insulation of small open economies from external monetary cycles.