Measuring Monetary Policy in Open Economies
AbstractThe empirical VAR literature on the monetary transmission mechanism in closed economies has been successful in providing evidence with which theoretical models of the monetary transmission mechanism are now confronted. The empirical VAR literature on the monetary transmission mechanism in open economies has not enjoyed the same success and it is still marred with a number of empirical puzzles. In this paper we firstly assess the relevance of the progress made estimating VAR in closed economies for the specification of VAR in open economies. Second, we propose to solve the simultaneity between exchange rate and policy interest rates by using information extracted from financial markets independently from the VAR. Lastly, we evaluate the relative importance of macroecomnomic and monetary policy variables in explaining short-term fluctuations in the nominal exchange rates. Our main results are that a commodity price index is an important variable in any VAR analysis of the monetary transmission mechanism, that the simultaneity between German policy rates and the US dollar/D mark exchange rate is not an empirically relevant problem, and that monetary factors are dominated by macroeconomic factors for the explanation of exchange rate fluctuations.
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Bibliographic InfoPaper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 133.
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Other versions of this item:
- 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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