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Measuring Monetary Policy in Open Economies

Author

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  • Bagliano, Fabio-Cesare
  • Favero, Carlo A.
  • Franco, Francesco

Abstract

The empirical VAR literature on the monetary transmission mechanism in open economies has not yet provided a commonly accepted solution to the problem of simultaneity between interest rates and the exchange rate. In this paper we propose to solve the identification problem by using information extracted from financial markets independently from the VAR to measure monetary policy shocks. We also evaluate the relative importance of macroeconomic and monetary policy variables in explaining short-term fluctuations in the nominal exchange rate. Our main results are that the simultaneity between German policy rates and the US\ dollar/D Mark exchange rate is not an empirically relevant problem, and that monetary variables are dominated by macroeconomic factors in the explanation of exchange rate fluctuations.

Suggested Citation

  • Bagliano, Fabio-Cesare & Favero, Carlo A. & Franco, Francesco, 1999. "Measuring Monetary Policy in Open Economies," CEPR Discussion Papers 2079, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:2079
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    Cited by:

    1. Norrbin, Stefan, 2001. "What Have We Learned from Empirical Tests of the Monetary Transmission Effect," Working Paper Series 121, Sveriges Riksbank (Central Bank of Sweden).
    2. Luis Carranza & Jose E. Galdon‐Sanchez & Javier Gomez‐Biscarri, 2010. "Understanding the Relationship between Financial Development and Monetary Policy," Review of International Economics, Wiley Blackwell, vol. 18(5), pages 849-864, November.
    3. Nicolas Groshenny & Naveed Javed, 2023. "Dornbusch’s overshooting and the systematic component of monetary policy in SOE-SVARs," TEPP Working Paper 2023-08, TEPP.
    4. Artis, Michael & Ehrmann, Michael, 2006. "The exchange rate - A shock-absorber or source of shocks? A study of four open economies," Journal of International Money and Finance, Elsevier, vol. 25(6), pages 874-893, October.
    5. Bagliano, Fabio C. & Favero, Carlo A., 1999. "Information from financial markets and VAR measures of monetary policy," European Economic Review, Elsevier, vol. 43(4-6), pages 825-837, April.
    6. Paolo Giordani, 2004. "Evaluating New‐Keynesian Models of a Small Open Economy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(s1), pages 713-733, September.
    7. Magdalena Petrovska & Ljupka Georgievska, 2015. "Alternative indicator of monetary policy stance for Macedonia," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Indicators to support monetary and financial stability analysis: data sources and statistical methodologies, volume 39, Bank for International Settlements.
    8. Giuseppe De Arcangelis & Giorgio Di Giorgio, 1999. "Monetary policy shocks and transmission in Italy: A VAR analysis," Economics Working Papers 446, Department of Economics and Business, Universitat Pompeu Fabra.
    9. Magdalena Petrovska & Ljupka Georgievska, 2015. "Alternative Indicator of Monetary Policy Stance for Macedonia," Working Papers 2015-01, National Bank of the Republic of North Macedonia.

    More about this item

    Keywords

    Exchange Rates; implicit forward rate curve; Monetary Policy; VAR models;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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