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Following Germany's Lead: Using International Monetary Linkages to Estimate the Effect of Monetary Policy on the Economy

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Author Info

  • Julian di Giovanni

    (International Monetary Fund, University of California, Berkeley, and NBER)

  • Justin McCrary

    (International Monetary Fund, University of California, Berkeley, and NBER)

  • Till von Wachter

    (Columbia University and NBER)

Abstract

Forward-looking behavior on the part of the monetary authority makes it difficult to estimate the effect of monetary policy interventions on output. We present instrumental variables estimates of the impact of interest rates on quarterly real output for several European countries, using German interest rates as the instrument. These estimates confirm a strong forward-looking bias in least squares estimates that persists even conditional on standard controls for the history of the system. Due to the potential for correlation of output shocks across countries, we interpret our estimates as lower bounds for the effect of monetary policy on real output. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 91 (2009)
Issue (Month): 2 (May)
Pages: 315-331

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Handle: RePEc:tpr:restat:v:91:y:2009:i:2:p:315-331

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Cited by:
  1. Delis, Manthos D & Kouretas, Georgios, 2010. "Interest rates and bank risk-taking," MPRA Paper 20132, University Library of Munich, Germany.
  2. Antonio Paradiso & Saten Kumar & B. Bhaskara Rao, 2013. "A New Keynesian IS curve for Australia: is it forward looking or backward looking?," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 45(26), pages 3691-3700, September.
  3. Georgios Kouretas & Chris Tsoumas & Anastasios A. Drakos, 2013. "Ownership, institutions and bank risk-taking in Central and Eastern European countries," EcoMod2013, EcoMod 5204, EcoMod.

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