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Money and monetary policy transmission in the euro area: evidence from FAVAR- and VAR approaches

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  • Blaes, Barno
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    Abstract

    This paper investigates the transmission of monetary policy in the euro area based on the factor augmented vector autoregressive approach of Bernanke, Boivin and Eliasz (2005) as well as on a standard VAR model. We focus on the reaction of monetary aggregates to a one-off monetary policy shock. We find that - as theory suggests - money growth is dampened by a restrictive monetary policy stance in the longer term. In the short-run, however, M3 growth may increase due to portfolio shifts caused by the rise in the short-term interest rate. This has consequences for the interpretation of money growth as an input for monetary policy decisions. --

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    Bibliographic Info

    Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2009,18.

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    Date of creation: 2009
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    Handle: RePEc:zbw:bubdp1:200918

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    Keywords: Monetary policy transmission; FAVAR; VAR; money stock; euro area.;

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    1. Breitung, Jörg & Eickmeier, Sandra, 2005. "Dynamic factor models," Discussion Paper Series 1: Economic Studies 2005,38, Deutsche Bundesbank, Research Centre.
    2. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
    3. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 2002. "Do Financial Variables Help Forecasting Inflation and Real Activity in the Euro Area?," CEPR Discussion Papers 3146, C.E.P.R. Discussion Papers.
    4. Andrew McCallum & Frank Smets, 2007. "Real wages and monetary policy transmission in the euro area," Kiel Working Papers 1360, Kiel Institute for the World Economy.
    5. Christopher A. Sims, 1992. "Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy," Cowles Foundation Discussion Papers 1011, Cowles Foundation for Research in Economics, Yale University.
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