Monetary Transmission Mechanism in Estonia - Some Theoretical Considerations and Stylized Aspects

The monetary system in Estonia is based on the currency board arrangement with German Mark. The strong commitments and rule-based features of currency board imply that there is no active monetary policy in Estonia – all necessarily monetary djustments are left to the market forces. Under fixed exchange rate and free capital mobility Estonian monetary conditions are therefore closely linked with monetary policy in Europe – in addition to the changes in Estonian risk-premium, interest rate developments in Europe can directly influence Estonian interest rates. Those monetary signals transmit widely into Estonian financial sector and ultimately into Estonian real sector through various channels. The interest rate and credit channel have gained special attention in this paper.