Monetary Transmission and Controllability of Money in Europe: aStructural Vector Error Correction Approach
In this paper, a structural vector error correction model (S-VECM) is estimated to investigate three essential prerequisites for a successful monetary targeting strategy: stability, controllability and predictability. First, multivariate cointegration techniques are used to identify two cointegration relations, that are identified as a long run money demand function and the Fisher effect for the long-term interest rate. Identification of the structural model is achieved by imposing contemporaneous and long-term restrictions. It is found that an interest rate shock hardly affects the nominal money stock, whereas the effects on excess money holdings and inflation are negative, but not significant.
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