Monetary determinants of output dynamics in the light of the structural vector-autoregressive SVAR model: A Keynesian approach

Abstract

PURPOSE: The purpose of the following paper is to analyze and empirically verify the monetary theory of business cycles as a mechanism for the interaction of the dynamics of production and money supply based on the example of the Polish economy. In order to identify and mitigate the risk of economic fluctuations as a function of the response of the central bank, it is necessary to conduct an extensive analysis of the indirect mechanism of transmission of monetary impulses on production in the economy. DESIGN/METHOD: Empirical analysis was carried out by estimating a macroeconometric time series model taking into account the inductive information based on the Keynesian theory  the structural vector- autoregressive SVAR model. The stochastic process included in the study was based on statistical data of Poland, which were obtained from the cyclical reports: ‘Preliminary estimate of gross domestic product’ and ‘Quarterly accounts of gross domestic product in 2017-2021’, Poland’s Central Statistical Office and the National Bank of Poland's databases for the time interval of 2007.Q1-2022.Q2. RESULTS/FINDINGS: The applied empirical analysis positively verified the existence of an indirect monetary impulse transmission mechanism in Poland’s economy. The obtained research has positively verified the compatibility of the monetary theory of the business cycle in terms of the Keynesian theory with the macroeconomic reality in Poland. The results of the research justify the measures to mitigate the risk of economic instability and impose a requirement for discretionary policy by the National Bank of Poland. ORIGINALITY/VALUE: The following work addresses an important element of the macroeconomic analysis, specifically the monetary theory of the business cycle. The originality of the work stems from the empirical attempt to verify the monetary theory of the business cycle taking into account the indirect mechanism of transmission of monetary impulses on the grounds of the statistical data from the Polish economy. KEYWORDS: endogenous money creation, macroeconometrics, monetary theory of the business cycle, time series decomposition, structural vector-autoregressive model. JEL: C32, E12, E41, E51, E52.