Much empirical literature has been devoted recently to Monetary Policy Transmission (MPT) mechanisms in Central and Eastern European Countries (CEECs). Most studies are motivated by the future adhesion of eight (and then ten) of them to the European Monetary Union (EMU)1. Indeed, eight of CEECs are new members of European Union (EU) since May 2004 (i.e., the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia). In 2007, Bulgaria and Romania are also due to join. Membership in EU necessitates respectingall the European laws and rules—the acquis communautaire—including the single currency project. Hence, sooner or later, new members of EU will have to join EMU2. In this context, a good knowledge on MPT mechanisms is particularly important. On one hand, differences on MPT mechanisms between ‘old’ EMU members and new ones may hamper the monetary policy decision-making of the European Central Bank (ECB) and may trigger an over-restrictive monetary stance within a few years. On the other, differences on MPT mechanisms between EMU members and forthcoming ones may also impede the present real convergence process of new EU members over those of the EMU. Thus, this may have destabilizing consequences on the whole EU project: Countries desperately lagging behind may find little incentives to cooperate with the ‘old’ EU countries on topics like better law enforcement, enhanced tax harmonization, etc.

The theoretical and empirical literature considers traditionally three channels for MPT mechanisms: The interest rate, the exchange rate, and the credit channels. While these channels are usually treated separately, the response of ultimate variables (e.g., output and its components, inflation, etc.), to a monetary policy shock will depend on combined effects of these three channels. Especially, it will depend on whether the exchange rate and credit channels accentuate or dampen the response of the economy to changes in interest rates3. According to the traditional Keynesian view, an increase in the nominal interest rate, by raising the real cost of borrowing, reduces investment and consumption. Then, following the demand fall, price begins to decrease (direct interest rate channel). If the increase in the nominal interest rate induces a real exchange rate appreciation (due to a nominal exchange rate appreciation), then net exports decrease, accentuating further the price decline (exchange
rate channel). Finally, the credit channel operates through the effect of monetary policy on the supply of loans by depository institutions (bank lending channel) and through the net worth and the financial position of potential borrowers.