IDEAS home Printed from
   My bibliography  Save this paper

Hazards in implementing a monetary conditions index


  • Kari H. Eika
  • Neil R. Ericsson
  • Ragnar Nymoen


Some recent studies have suggested constructing a Monetary Conditions Index (or MCI) to serve as an indicator of monetary policy stance. The central banks of Canada, Sweden, and Norway all construct an MCI and (to varying degrees) use it in conducting monetary policy. Empirically, an MCI is calculated as the weighted sum of changes in a short-term interest rate and the exchange rate relative to values in a baseline year. The weights aim to reflect these variables' effects on longer-term focuses of policy -- economic activity and inflation. This paper derives analytical and empirical properties of MCIs in an attempt to ascertain their usefulness in monetary policy. ; An MCI assumes an underlying model relating economic activity and inflation to the variables in the MCI. Several issues arise for that model, including its empirical constancy, cointegration, exogeneity, dynamics, and potential omitted variables. Because of its structure, the model is unlikely to be constant or to have strongly exogenous variables; and we show that constancy and exogeneity are critical for the usefulness of an MCI. Empirical analyses of Canadian, Swedish, and Norwegian MCIs confirm such difficulties. Thus, the value of an MCI for conduct of economic policy is in doubt.

Suggested Citation

  • Kari H. Eika & Neil R. Ericsson & Ragnar Nymoen, 1996. "Hazards in implementing a monetary conditions index," International Finance Discussion Papers 568, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:568

    Download full text from publisher

    File URL:
    Download Restriction: no

    File URL:
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    1. David Mayes & Brendon Riches, 1996. "The effectiveness of monetary policy in New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 59, March.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Monetary policy;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedgif:568. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Franz Osorio). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.