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Measuring monetary conditions in Europe: Use and limitations of the monetary conditions index

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  • Peeters, Marga

Abstract

The monetary conditions index is a composite index of interest and exchange rates frequently used by central banks, the International Monetary Fund, and the Organisation for Economic Cooperation and Development. This paper considers the benefits and weaknesses of the monetary conditions index in the light of large macroeconometric models. It follows that the impact of the exchange rate on gross domestic product relative to the impact of the short-term interest rate is substantially lower under a monetary union. For most countries, including a long-term interest rate only affects the level of the monetary conditions index and not its turning points.

Suggested Citation

  • Peeters, Marga, 1999. "Measuring monetary conditions in Europe: Use and limitations of the monetary conditions index," MPRA Paper 23534, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:23534
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    File URL: https://mpra.ub.uni-muenchen.de/23534/1/MPRA_paper_23534.pdf
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    References listed on IDEAS

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    1. Eika, Kari H & Ericsson, Neil R & Nymoen, Ragnar, 1996. "Hazards in Implementing a Monetary Conditions Index," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(4), pages 765-790, November.
    2. Frank Smets, 1997. "Financial-asset Prices and Monetary Policy: Theory and Evidence," RBA Annual Conference Volume (Discontinued), in: Philip Lowe (ed.),Monetary Policy and Inflation Targeting, Reserve Bank of Australia.
    3. Duguay, Pierre, 1994. "Empirical evidence on the strength of the monetary transmission mechanism in Canada: An aggregate approach," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 39-61, February.
    4. Richard Dennis, 1997. "A measure of monetary conditions," Reserve Bank of New Zealand Discussion Paper Series G97/1, Reserve Bank of New Zealand.
    5. Grande, Giuseppe, 1997. "Properties of the monetary conditions index," MPRA Paper 23515, University Library of Munich, Germany.
    6. Mayes, David G. & Razzak, W. A., 1998. "Transparency and accountability: Empirical models and policy making at the Reserve Bank of New Zealand," Economic Modelling, Elsevier, vol. 15(3), pages 377-394, July.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Ali MNA & Moheddine YOUNSI, 2018. "A monetary conditions index and its application on Tunisian economic forecasting," Journal of Economics and Political Economy, KSP Journals, vol. 5(1), pages 38-56, March.
    2. 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 Limited, vol. 4(3), pages 218-231, July.
    3. Dieter Gerdesmeier & Hans-Eggert Reimers & Barbara Roffia, 2016. "Asset Prices and Consumer Prices: Exploring the Linkages," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot GmbH, Berlin, vol. 62(3), pages 169-186.
    4. 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.
    5. P. Burger & T. Knedlik, 2004. "The Mci As A Monetary Policy Guide In A Small, Open Emerging Market Economy," South African Journal of Economics, Economic Society of South Africa, vol. 72(2), pages 365-383, June.
    6. Arnold, Ivo J.M., 2024. "The effect of fragmentation risk on monetary conditions in the euro area," Journal of International Money and Finance, Elsevier, vol. 146(C).
    7. Goodhart, Charles A. E. & Hofmann, Boris, 2003. "FCIs and economic activity: Some international evidence," ZEI Working Papers B 14-2003, University of Bonn, ZEI - Center for European Integration Studies.
    8. Gottschalk, Jan, 2001. "Monetary Conditions in the Euro Area: Useful Indicators of Aggregate Demand Conditions?," Kiel Working Papers 1037, Kiel Institute for the World Economy (IfW Kiel).
    9. Bayangos, V.B., 2000. "real monetary conditions index for the Philippines : is it useful?," ISS Working Papers - General Series 19054, International Institute of Social Studies of Erasmus University Rotterdam (ISS), The Hague.
    10. Wai-Ching Poon, 2010. "A monetary policy rule: The augmented Monetary Conditions Index for Philippines using UECM and bounds tests," Monash Economics Working Papers 04-10, Monash University, Department of Economics.
    11. 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.

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    More about this item

    Keywords

    monetary conditions; exchange rates; interest rates; monetary policy; macroeconometric model;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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