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Monetary Policy Transmission and Macroeconomic Dynamics in Luxembourg: Results from a VAR Analysis

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  • Romuald Morhs

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    Abstract

    The aim of this work is to study the interactions between monetary policy, credit, house prices and the macroeconomy in Luxembourg using a VAR model with quarterly data in levels from 1986 to 2009. The results of the structural analysis provide valuable information concerning the monetary policy transmission mechanism, the interactions between credit and house prices, and the importance of foreign shocks for the behaviour of domestic variables. Some tentative explanations related to the particular economic and financial structures of the Luxembourg economy are moreover suggested to interprete this empirical evidence. More specifically, the structural analysis leads to the following conclusions: (1) In accordance with the existing VAR literature, a contractionary monetary policy shock leads to a temporary decrease in output and to a gradual decline in prices. (2) Monetary policy transmission to the real economy is relatively strong in Luxembourg, a result that could be associated with the variable interest rate structure of loans to the private sector, the high degree of openness and the preponderance of the financial services industry. (3) The response of credit and GDP following a residential property price shock provides some scope for the existence of a house price channel of monetary policy transmission in Luxembourg. (4) Finally, domestic variables respond strongly to foreign shocks, as evidenced by both the impulse response functions and the forecast error variance decomposition.

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    File URL: http://www.bcl.lu/fr/publications/cahiers_etudes/49/BCLWP049.pdf
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    Bibliographic Info

    Paper provided by Central Bank of Luxembourg in its series BCL working papers with number 49.

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    Length: 40 pages
    Date of creation: Dec 2010
    Date of revision:
    Handle: RePEc:bcl:bclwop:bclwp049

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    Web page: http://www.bcl.lu/

    Related research

    Keywords: Monetary policy; small open economy; VAR; macroeconomic shocks;

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    1. Adalid, Ramón & Detken, Carsten, 2007. "Liquidity shocks and asset price boom/bust cycles," Working Paper Series 0732, European Central Bank.
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    14. Assenmacher-Wesche, Katrin & Gerlach, Stefan, 2008. "Ensuring Financial Stability: Financial Structure and the Impact of Monetary Policy on Asset Prices," CEPR Discussion Papers 6773, C.E.P.R. Discussion Papers.
    15. Iacoviello, Matteo, 2000. "House prices and the macroeconomy in Europe: Results from a structural var analysis," Working Paper Series 0018, European Central Bank.
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    Cited by:
    1. Paolo Guarda & Abdelaziz Rouabah & John Theal, 2011. "An MVAR Framework to Capture Extreme Events in Macroprudential Stress Tests," BCL working papers 63, Central Bank of Luxembourg.

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