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The exchange rate and monetary conditions in the euro area


  • Mayes, David G.
  • Virén, Matti


Using information from a variety of sources, including our own estimates from quarterly data for each of the countries over the period 1972-1997, this paper suggests that the exchange rate will play an important role in the transmission of the impact of monetary policy through to the real economy and inflation in the euro area.Although the share of external trade in the euro area's GDP is only around 10 per cent this is only one factor that affects the transmission mechanism and the role of the exchange rate is likely to be substantially greater when all factors are taken into account.As a first approximation it would be reasonable to assume that an increase in the real 90-day interest rate of 100 basis points would have approximately the same effect on demand pressure two years later as a 3.5 per cent fall in the real euro exchange rate.This implies that the euro area will tend to behave like a large open economy rather than a closed economy and hence that it would be helpful in informing monetary policy to construct a Monetary Conditions Index (MCI) using these weights.A separate paper (Mayes and Virén 1998) suggests how an MCI provides a useful summary of high frequency information to assist monetary policy and financial markets in short run decisions.. Keywords: monetary conditions index, exchange rate, monetary policy, euro area

Suggested Citation

  • Mayes, David G. & Virén, Matti, 1998. "The exchange rate and monetary conditions in the euro area," Research Discussion Papers 27/1998, Bank of Finland.
  • Handle: RePEc:bof:bofrdp:1998_027

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    Cited by:

    1. Paulo Soares Esteves, 2003. "Monetary Conditions Index for Portugal," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
    2. Andrzej Toroj, 2011. "Competitiveness channel in Poland and Slovakia: a pre-EMU DSGE analysis," NBP Working Papers 86, Narodowy Bank Polski, Economic Research Department.
    3. David Mayes & Matti Virén, 2010. "The Impact Of Asset Prices And Their Information Value For Monetary Policy," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 28(61), pages 134-167, August.
    4. Alberto Montagnoli & Oreste Napolitano, 2004. "Financial Condition Index and interest rate settings: a comparative analysis," Money Macro and Finance (MMF) Research Group Conference 2004 1, Money Macro and Finance Research Group.
    5. Wladimir Andreff, 2001. "The benefits of EU enlargement and Euro membership for Central and Eastern European Countries," Revue d'Économie Financière, Programme National Persée, vol. 6(1), pages 48-63.
    6. Torój, Andrzej, 2010. "Adjustment capacity in a monetary union: a DSGE evaluation of Poland and Slovakia," MF Working Papers 4, Ministry of Finance in Poland, revised 11 May 2010.
    7. Chaouech, Olfa, 2015. "Taylor rule in practice : Evidence from tunisia," MPRA Paper 66771, University Library of Munich, Germany, revised 18 Sep 2015.
    8. Wladimir Andreff, 2001. "Les gains attendus par les pays d'Europe Centrale et Orientale de l'élargissement de l'Union européenne et de l'entrée dans l'euro," Revue d'Économie Financière, Programme National Persée, vol. 6(1), pages 49-64.
    9. ?lyas ??klar & Burhan Do?an, 2015. "Monetary Condition Index with Time Varying Weights: An Application to Turkish Data," Business and Economic Research, Macrothink Institute, vol. 5(1), pages 117-132, June.
    10. Caesar P Lack, 2003. "A financial conditions index for Switzerland," BIS Papers chapters,in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 398-413 Bank for International Settlements.
    11. David Mayes & Matti Viren, 2002. "Asymmetry and the Problem of Aggregation in the Euro Area," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 29(1), pages 47-73, March.
    12. Pyyhtiä, Ilmo, 1999. "The nonlinearity of the Phillips curve and European monetary policy," Research Discussion Papers 17/1999, Bank of Finland.
    13. 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.
    14. Muhamed Zulkhibri Abdul Majid, 2012. "Measuring monetary conditions in a small open economy: the case of Malaysia," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 4(3), pages 218-231, July.
    15. Mayes, David & Virén, Matti, 2004. "Asymmetries in the Euro area economy," Research Discussion Papers 9/2004, Bank of Finland.
    16. Wai Ching Poon, 2010. "Augmented MCi: AN Indicator Of Monetary Policy Stance For ASEAN-5?," Monash Economics Working Papers 25-10, Monash University, Department of Economics.
    17. Mayes, David G. & Viren, Matti, 2005. "Monetary policy problems for currency unions: asymmetry and the problem of aggregation in the euro area," Economic Modelling, Elsevier, vol. 22(2), pages 219-251, March.
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    19. Virén, Matti, 1999. "Fiscal Policy, Automatic Stabilisers and Policy Coordination in EMU," Discussion Papers 204, VATT Institute for Economic Research.
    20. Mna, Ali & Younsi, Moheddine, 2018. "A Monetary Conditions Index and its Application on Tunisian Economic Forecasting," MPRA Paper 83648, University Library of Munich, Germany.
    21. Fritz Breuss, 2002. "Was ECB's monetary policy optimal?," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 30(3), pages 298-319, September.
    22. Mayes, David & Virén, Matti, 2009. "Changes in behaviour under EMU," Economic Modelling, Elsevier, vol. 26(4), pages 751-759, July.
    23. Fritz Breuss, 2002. "Was ECB's Monetary Policy Optimal?," WIFO Working Papers 173, WIFO.
    24. Bofinger, Peter & Wollmershauser, Timo, 2001. "Is there a third way to EMU for the EU accession countries?," Economic Systems, Elsevier, vol. 25(3), pages 253-274, September.
    25. Chaouech, Olfa, 2015. "Taylor rule in practice: Evidence from Tunisia," MPRA Paper 74628, University Library of Munich, Germany, revised 16 Oct 2016.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies


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