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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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    6. Faust, Jon & Svensson, Lars E O, 2001. "Transparency and Credibility: Monetary Policy with Unobservable Goals," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(2), pages 369-97, May.
    7. 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.
    8. Favero, Carlo A. & Rovelli, Riccardo, 1999. "Modelling and Identifying Central Banks' Preferences," CEPR Discussion Papers 2178, C.E.P.R. Discussion Papers.
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    14. Stephen Cecchetti & Michael Ehrmann, 2000. "Does Inflation Targeting Increase Output volatility? An International Comparison of Policy Maker's Preferences and Outcomes," Working Papers Central Bank of Chile 69, Central Bank of Chile.
    15. Mojon, Benoît & Peersman, Gert, 2001. "A VAR description of the effects of monetary policy in the individual countries of the euro area," Working Paper Series 0092, European Central Bank.
    16. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, vol. 47(5), pages 1267-86, September.
    17. 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.
    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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