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Following Germany'S Lead

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  • International Monetary Fund

Abstract

Forward-looking behavior on the part of the monetary authority leads least squares estimates to understate the true growth consequences of monetary policy interventions. We present instrumental variables estimates of the impact of interest rates on real output growth for several European countries, using German interest rates as the instrument. We show that the difference between least squares and instrumental variables estimates provides bounds for the degree of endogeneity in monetary policy. The results confirm a considerable downward bias of estimates that do not account for potential forward-looking monetary policy decisions. The bias is higher for countries whose monetary policy was more independent of Germany.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/86.

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Length: 39
Date of creation: 01 Apr 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/86

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  1. Obstfeld, Maurice & Shambaugh, Jay C & Taylor, Alan M, 2004. "Monetary Sovereignty, Exchange Rates, and Capital Controls: The Trilemma in the Interwar Period," CEPR Discussion Papers 4353, C.E.P.R. Discussion Papers.
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Cited by:
  1. Arend, Mario, 2005. "Efectos de una nueva medida de shock monetario bajo el esquema de metas de inflaciĆ³n en Chile
    [Effects of a New Measure of Monetary Shock Under Inflation Targeting in Chile]
    ," MPRA Paper 27156, University Library of Munich, Germany.

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