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Measuring Monetary Policy Efficiency in European Union Countries: The Pre-EMU Years

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  • Stefan Krause

Abstract

This paper proposes a method for measuring the contribution of an improved monetary policy to the changes in macroeconomic performance—identified with inflation and output stability. The technique used involves estimating actual and optimal policy rules as a function of the aggregate supply and demand shocks, with the purpose of examining how much of the change in performance can be accounted for by changes in the volatility of the aggregate shocks and how much can be ascribed to improvements in policy efficiency. A study of the changes in the macroeconomic performance of 14 European Union countries from the 1980s to the 1990s is undertaken here. The findings suggest that an improved monetary policy has played an important stabilization role in almost all European Union countries, while a diminished exposure to aggregate shocks has largely contributed towards improved performance in at least seven countries.

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Bibliographic Info

Article provided by IUP Publications in its journal The IUP Journal of Monetary Economics.

Volume (Year): V (2007)
Issue (Month): 1 (February)
Pages: 60-83

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Handle: RePEc:icf:icfjmo:v:05:y:2007:i:1:p:60-83

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  1. Olivier Jean Blanchard & Danny Quah, 1990. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
  2. Uhlig, Harald, 1999. "What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure," CEPR Discussion Papers 2137, C.E.P.R. Discussion Papers.
  3. Jon Faust & Lars E.O. Svensson, 1998. "Transparency and credibility: monetary policy with unobservable goals," International Finance Discussion Papers 605, Board of Governors of the Federal Reserve System (U.S.).
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  5. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  6. Stephen G. Cecchetti & Alfonso Flores-Lagunes & Stefan Krause, 2006. "Has Monetary Policy become more Efficient? a Cross-Country Analysis," Economic Journal, Royal Economic Society, vol. 116(511), pages 408-433, 04.
  7. Benoit Mojon & Gert Peersman, 2001. "A VAR description of the effects of monetary policy in the individual countries of the Euro area," Working Paper Series 092, European Central Bank.
  8. Glenn D. Rudebusch, 2001. "Is The Fed Too Timid? Monetary Policy In An Uncertain World," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 203-217, May.
  9. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-62, May.
  10. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, vol. 6(3), pages 353-98, September.
  11. David H. Romer, 2000. "Keynesian Macroeconomics without the LM Curve," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 149-169, Spring.
  12. Carlo A. Favero & Riccardo Rovelli, . "Modeling and identifying central banks' preferences," Working Papers 148, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  13. Fabio Canova & Gianni De Nicolo, 2000. "Monetary disturbances matter for business fluctuations in the G-7," International Finance Discussion Papers 660, Board of Governors of the Federal Reserve System (U.S.).
  14. Stephen G. Cecchetti & Michael Ehrmann, 1999. "Does Inflation Targeting Increase Output Volatility? An International Comparison of Policymakers' Preferences and Outcomes," NBER Working Papers 7426, National Bureau of Economic Research, Inc.
  15. Georgios Chortareas & David Stasavage & Gabriel Sterne, 2002. "Does it pay to be transparent? international evidence form central bank forecasts," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 99-118.
  16. Richard Dennis, 2001. "The policy preferences of the U.S. Federal Reserve," Working Papers in Applied Economic Theory 2001-08, Federal Reserve Bank of San Francisco.
  17. Stefan Krause, 2003. "Why Should Policy Makers Care About Inflation and Output Variability? The Role of Monetary Policy Stabilization under Asymmetric Information," Emory Economics 0313, Department of Economics, Emory University (Atlanta).
  18. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  19. Taylor, John B, 2000. "Alternative Views of the Monetary Transmission Mechanism: What Difference Do They Make for Monetary Policy?," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 60-73, Winter.
  20. Stephen G. Cecchetti & Margaret M. McConnell & Gabriel Perez Quiros, 1999. "Policymakers' revealed preferences and the output-inflation variability trade-off: implications for the European system of central banks," Proceedings, Federal Reserve Bank of San Francisco.
  21. Stephen G. Cecchetti & Stefan Krause, 2002. "Central bank structure, policy efficiency, and macroeconomic performance: exploring empirical relationships," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 47-60.
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Cited by:
  1. Stephen G. Cecchetti & Alfonso Flores-Lagunes & Stefan Krause, 2006. "Has Monetary Policy become more Efficient? a Cross-Country Analysis," Economic Journal, Royal Economic Society, vol. 116(511), pages 408-433, 04.
  2. Gerberding, Christina & Worms, Andreas & Seitz, Franz, 2004. "How the Bundesbank really conducted monetary policy: An analysis based on real-time data," Discussion Paper Series 1: Economic Studies 2004,25, Deutsche Bundesbank, Research Centre.
  3. Stephen G. Cecchetti & Stefan Krause, 2002. "Central bank structure, policy efficiency, and macroeconomic performance: exploring empirical relationships," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 47-60.

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