Measuring Monetary Policy Interdependence

This paper measures the degree of monetary policy interdependence between major industrializedcountries from a new perspective. The analysis uses a special data set on central bank issued policyrate targets for 14 OECD countries. Methodologically, our approach is novel in that we separatelyexamine monetary interdependence due to (1) the coincidence in time of when policy actions areexecuted from (2) the nature and magnitude of the policy adjustments made. The first of theseelements requires that the timing of events be modeled with a dynamic discrete duration design. Thediscrete nature of the policy rate adjustment process that characterizes the second element is capturedwith an ordered response model. The results indicate there is significant policy interdependenceamong these 14 countries during the 1980-1998 sample period. This is especially true for a numberof European countries which appeared to respond to German policy during our sample period. Anumber of other countries appeared to respond to U.S. policy, though this number is smaller thanthat suggested in preceding studies. Moreover, the policy harmonization we find appears to workthrough channels other than formal coordination agreements.