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Measuring Monetary Policy Efficiency in European Union Countries: The Pre-EMU Years

  • Stefan Krause
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    This paper proposes a method for measuring the contribution of an improved monetary policy to the changes in macroeconomic performance—identified with inflation and output stability. The technique used involves estimating actual and optimal policy rules as a function of the aggregate supply and demand shocks, with the purpose of examining how much of the change in performance can be accounted for by changes in the volatility of the aggregate shocks and how much can be ascribed to improvements in policy efficiency. A study of the changes in the macroeconomic performance of 14 European Union countries from the 1980s to the 1990s is undertaken here. The findings suggest that an improved monetary policy has played an important stabilization role in almost all European Union countries, while a diminished exposure to aggregate shocks has largely contributed towards improved performance in at least seven countries.

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    Article provided by IUP Publications in its journal The IUP Journal of Monetary Economics.

    Volume (Year): V (2007)
    Issue (Month): 1 (February)
    Pages: 60-83

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    Handle: RePEc:icf:icfjmo:v:05:y:2007:i:1:p:60-83
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    1. Stephen G. Cecchetti & Alfonso Flores-Lagunes & Stefan Krause, 2006. "Has Monetary Policy become more Efficient? a Cross-Country Analysis," Economic Journal, Royal Economic Society, vol. 116(511), pages 408-433, 04.
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    6. Taylor, John B, 2000. "Alternative Views of the Monetary Transmission Mechanism: What Difference Do They Make for Monetary Policy?," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 60-73, Winter.
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    15. Stephen G. Cecchetti & Margaret M. McConnell & Gabriel Perez Quiros, 1999. "Policymakers' revealed preferences and the output-inflation variability trade-off: implications for the European system of central banks," Proceedings, Federal Reserve Bank of San Francisco.
    16. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-62, May.
    17. Stephen G. Cecchetti & Stefan Krause, 2002. "Central bank structure, policy efficiency, and macroeconomic performance: exploring empirical relationships," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 47-60.
    18. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, vol. 6(3), pages 353-98, September.
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    21. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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