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The Exchange Rate and Monetary Conditions in the Euro Area

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Author Info
Mayes, D.G.
Viren, M.

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Abstract

Using information from a variety of sources, including our own estimates from quarterly data for each of the countries over the period 1972 - 1997, this paper suggests that the exchange rate will play an important role in the transmission of the impact of monetary policy through to the real economy and inflation in the euro area. Although the share of external trade in the euro area's GDP is only around 10 per cent this is only one factor that affects the transmission mechanism and the role of the exchange rate is likely to be substantially greater when all factors are taken into account. As a first approximation it would be reasonable to assume that an increase in the real 90-day interest rate of 100 basis points would have approximately the same effect on demand pressure two years later as a 3.5 per cent fall in the real euro exchange rate. This implies that the euro area will tend to behave like a large open economy rather than a closed economy and hence that it would be helpful in informing monetary policy to construct a Monetary Conditions Index (MCI) using these weights. A separate paper (Mayes and Virén, 1998) suggests how an MCI provides a useful summary of high frequency information to assist monetary policy and financial markets in short run decisions.

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Publisher Info
Paper provided by Bank of Finland. Research Department. in its series Bank of Finland - Studies in Economics and Finance with number 27/98.

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Length: 50 pages
Date of creation: 1998
Date of revision:
Handle: RePEc:fth:bfsefi:27/98

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Postal: Bank of Finland. Research Department. P.O. Box 160, FIN-00101, Helsinki, Finland.
Web page: http://www.bof.fi/
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Related research
Keywords: MONETARY POLICY EXCHANGE RATE

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Duguay, Pierre, 1994. "Empirical evidence on the strength of the monetary transmission mechanism in Canada: An aggregate approach," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 39-61, February. [Downloadable!] (restricted)
  2. Rudiger Dornbusch & Carlo A. Favero & Francesco Giavazzi, 1998. "The Immediate Challenges for the European Central Bank," NBER Working Papers 6369, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Christopher A. Sims, 1986. "Are forecasting models usable for policy analysis?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-16. [Downloadable!]
  4. Ramana Ramaswamy & Torsten Slok, 1998. "The Real Effects of Monetary Policy in the European Union: What Are the Differences?," IMF Staff Papers, Palgrave Macmillan Journals, vol. 45(2), pages 6. [Downloadable!] (restricted)
  5. Charles L. Evans & Kenneth N. Kuttner, 1998. "Can VAR's describe monetary policy?," Working Paper Series WP-98-19, Federal Reserve Bank of Chicago. [Downloadable!]
    Other versions:
  6. H.M.M. Peeters, 1998. "Monetary Conditions in Europe: a methodological analysis," WO Research Memoranda (discontinued) 547, Netherlands Central Bank, Research Department.
  7. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 907-31, November.
    Other versions:
  8. Kari H. Eika & Neil R. Ericsson & Ragnar Nymoen, 1996. "Hazards in implementing a monetary conditions index," International Finance Discussion Papers 568, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  9. Hukkinen, Juhana & Viren, Matti, 1998. "How to Evaluate the Forecasting Performance of a Macroeconomic Model," Research Discussion Papers 5/1998, Bank of Finland. [Downloadable!]
  10. Clemens J. M. Kool & John A. Tatom, 1994. "The P-star model in five small economies," Review, Federal Reserve Bank of St. Louis, issue May, pages 11-29. [Downloadable!]
  11. Jacobson, Tor & Jansson, Per & Vredin, Anders & Warne, Anders, 1999. "A VAR Model for Monetary Policy Analysis in a Small Open Economy," Working Paper Series 77, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
  12. Mayes, David G. & Razzak, W. A., 1998. "Transparency and accountability: Empirical models and policy making at the Reserve Bank of New Zealand," Economic Modelling, Elsevier, vol. 15(3), pages 377-394, July. [Downloadable!] (restricted)
  13. Bernanke, Ben S. & Mihov, Ilian, 1995. "Measuring Monetary Policy," Economics Series 10, Institute for Advanced Studies. [Downloadable!]
    Other versions:
  14. David Mayes & Brendon Riches, 1996. "The effectiveness of monetary policy in New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 59, March. [Downloadable!]
  15. Bagliano, Fabio-Cesare & Favero, Carlo A, 1997. "Measuring Monetary Policy with VAR Models: An Evaluation," CEPR Discussion Papers 1743, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  16. Guthrie, Graeme & Wright, Julian, 2000. "Open mouth operations," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 489-516, October. [Downloadable!] (restricted)
  17. Hukkinen, J. & Viren, M., 1998. "How to Evaluate the Forecasting Performance of a Macroeconomic Model," Bank of Finland - Studies in Economics and Finance 5/98, Bank of Finland. Research Department..
  18. Rudi Dornbusch & Carlo Favero & Francesco Giavazzi, 1998. "Immediate challenges for the European Central Bank," Economic Policy, CEPR, CES, MSH, vol. 13(26), pages 15-64, 04. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Juha Kilponen & David Mayes & Jouko Vilmunen, 1999. "Labour Market Flexibility in Northern Europe," One Europe or Several? Working Papers 2, One-Europe Programme. [Downloadable!]
    Other versions:
  2. Alberto Montagnoli & Oreste Napolitano, 2005. "Financial Condition Index And Interest Rate Settings: A Comparative Analysis," Working Papers 8_2005, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy. [Downloadable!]
    Other versions:
  3. Matti Virén, 1999. "Fiscal Policy, Automatic Stabilisers and Policy Coordination in EMU," VATT Discussion Papers 204, Government Institute for Economic Research (VATT). [Downloadable!]
  4. Brian Ardy, 2000. "A Question of Fit for EMU: Process and Policy in the Fiscal Domain," One Europe or Several? Working Papers 13, One-Europe Programme. [Downloadable!]
  5. Ripatti, Antti & Saikkonen, Pentti, 1998. "Cointegrated Vector Autoregressive Processes with Continuous Structural Changes," Research Discussion Papers 29/1998, Bank of Finland. [Downloadable!]
  6. Kevin S. Nell, 2004. "The structuralist theory of imported inflation: an application to South Africa," Applied Economics, Taylor and Francis Journals, vol. 36(13), pages 1431-1444, July. [Downloadable!] (restricted)
  7. Fritz Breuss, 0002. "Was ECB's Monetary Policy Optimal?," WIFO Working Papers 173, WIFO. [Downloadable!]
  8. Pyyhtiä, Ilmo, 1999. "The Nonlinearity of the Phillips Curve and European Monetary Policy," Research Discussion Papers 17/1999, Bank of Finland. [Downloadable!]
  9. Alfred Guender, 2005. "On Optimal Monetary Policy Rules and the Construction of MCIs in the Open Economy," Open Economies Review, Springer, vol. 16(2), pages 189-207, April. [Downloadable!] (restricted)
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