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The effect of monetary policy on output in EMU3: A sign restriction approach

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  • Rafiq, M.S.
  • Mallick, S.K.

Abstract

This paper examines the effects of monetary policy shocks on output in the three largest euro area economies - Germany, France and Italy (EMU3) - by applying a new VAR identification procedure. The results show that monetary policy innovations are at their most potent in Germany. However, apart from Germany, it remains ambiguous as to whether a rise in interest rates concludes with a fall in output, showing a lack of homogeneity in the responses. Homogeneity in response to a monetary shock is crucial in a one-size-fits-all framework. Nonetheless, the lack of similarity between the responses, which is hypothesised to cause de-synchronised business cycles in optimal currency area literature, is often based on the premise that monetary policy itself is a major source of business cycle fluctuations. This paper concludes that monetary policy innovations play, at most, a modest role in generating fluctuations in output for the EMU3. Consequently, it is less important whether the effects of monetary policy are homogenous.

Suggested Citation

  • Rafiq, M.S. & Mallick, S.K., 2008. "The effect of monetary policy on output in EMU3: A sign restriction approach," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1756-1791, December.
  • Handle: RePEc:eee:jmacro:v:30:y:2008:i:4:p:1756-1791
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