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Monetary policy and exchange rate dynamics in the Spanish economy

Author

Listed:
  • Javier Andrés

    (University of Valencia, Edificio Oriental, Avénida de los Naranjos, E-46022 Valencia, Spain European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt/Main, Germany Research Department, Banco de España, Alcalá 50, E-28014 Madrid, Spain)

  • Ricardo Mestre

    (University of Valencia, Edificio Oriental, Avénida de los Naranjos, E-46022 Valencia, Spain European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt/Main, Germany Research Department, Banco de España, Alcalá 50, E-28014 Madrid, Spain)

  • Javier Vallés

    (University of Valencia, Edificio Oriental, Avénida de los Naranjos, E-46022 Valencia, Spain European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt/Main, Germany Research Department, Banco de España, Alcalá 50, E-28014 Madrid, Spain)

Abstract

As the Spanish economy gets more integrated in international markets, the real exchange rate becomes a key determinant of the monetary transmission. In this paper we trace out the dynamic response of prices, output and the exchange rate following a monetary policy shock. We estimate a structural VAR model whose identification scheme is based on the long run properties common to a large class of models. The results suggest that a small model with efficient asset markets plus nominal inertia and long run monetary neutrality, captures the essential features of the monetary transmission mechanism in Spain. The interest rate shock is well identified and the exchange rate overshoots its long run value. There are no signs of liquidity puzzle nor of price puzzle or exchange rate puzzle either.

Suggested Citation

  • Javier Andrés & Ricardo Mestre & Javier Vallés, 1999. "Monetary policy and exchange rate dynamics in the Spanish economy," Spanish Economic Review, Springer;Spanish Economic Association, vol. 1(1), pages 55-77.
    • Handle: RePEc:spr:specre:v:1:y:1999:i:1:p:55-77
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    Cited by:

    1. Monticello, Carlo & Tristani, Oreste, 1999. "What does the single monetary policy do? A SVAR benchmark for the European Central Bank," Working Paper Series 0002, European Central Bank.
    2. Pedro José Pérez Vázquez, 2003. "Fuentes de variabilidad en las principales economías occidentales," Investigaciones Economicas, Fundación SEPI, vol. 27(3), pages 565-591, September.
    3. Javier Andrés & Ignacio Hernando & J. David López-Salido, 1999. "Assessing the benefits of price stability: The international experience," Estudios Económicos, Banco de España, number 69.

    More about this item

    Keywords

    Structural VAR; monetary shocks; exchange rate; overshooting;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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