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Measuring monetary conditions in Europe: Use and limitations of the monetary conditions index

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  • Peeters, Marga

Abstract

The monetary conditions index is a composite index of interest and exchange rates frequently used by central banks, the International Monetary Fund, and the Organisation for Economic Cooperation and Development. This paper considers the benefits and weaknesses of the monetary conditions index in the light of large macroeconometric models. It follows that the impact of the exchange rate on gross domestic product relative to the impact of the short-term interest rate is substantially lower under a monetary union. For most countries, including a long-term interest rate only affects the level of the monetary conditions index and not its turning points.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 23534.

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Date of creation: 1999
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Handle: RePEc:pra:mprapa:23534

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Keywords: monetary conditions; exchange rates; interest rates; monetary policy; macroeconometric model;

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References

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  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.
  2. Grande, G., 1997. "Properties of the Monetary Conditions Index," Papers, Banca Italia - Servizio di Studi 324, Banca Italia - Servizio di Studi.
  3. Eika, K.H. & Ericsson, N.R. & Nymoen, R., 1996. "Hazards in Implementing a Monetary Conditions Index," Memorandum 32/1996, Oslo University, Department of Economics.
  4. Richard Dennis, 1997. "A measure of monetary conditions," Reserve Bank of New Zealand Discussion Paper Series G97/1, Reserve Bank of New Zealand.
  5. 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.
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Cited by:
  1. H.M.M. Peeters, 1999. "Achieving price stability in the euro zone: Monetary or inflation targeting ?," WO Research Memoranda (discontinued) 589, Netherlands Central Bank, Research Department.
  2. Abdul Majid, Muhamed Zulkhibri, 2010. "Measuring Monetary Conditions in A Small Open Economy: The Case of Malaysia," MPRA Paper 29041, University Library of Munich, Germany.
  3. Haan, Leo de & Sterken, Elmer, 2002. "Corporate governance, relationship lending and monetary lending monetary policy: firm-level evidence for the Euro area," CCSO Working Papers 200212, University of Groningen, CCSO Centre for Economic Research.
  4. 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.
  5. Goodhart, Charles A. E. & Hofmann, Boris, 2003. "FCIs and economic activity: Some international evidence," ZEI Working Papers B 14-2003, ZEI - Center for European Integration Studies, University of Bonn.
  6. Bayangos, V.B., 2000. "real monetary conditions index for the Philippines : is it useful?," ISS Working Papers - General Series, International Institute of Social Studies of Erasmus University Rotterdam (ISS), The Hague 19054, International Institute of Social Studies of Erasmus University Rotterdam (ISS), The Hague.
  7. Wai-Ching Poon, 2010. "A monetary policy rule: The augmented Monetary Conditions Index for Philippines using UECM and bounds tests," Monash Economics Working Papers 04-10, Monash University, Department of Economics.

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