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Money and monetary policy transmission in the euro area: evidence from FAVAR- and VAR approaches

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  • Blaes, Barno

Abstract

This paper investigates the transmission of monetary policy in the euro area based on the factor augmented vector autoregressive approach of Bernanke, Boivin and Eliasz (2005) as well as on a standard VAR model. We focus on the reaction of monetary aggregates to a one-off monetary policy shock. We find that - as theory suggests - money growth is dampened by a restrictive monetary policy stance in the longer term. In the short-run, however, M3 growth may increase due to portfolio shifts caused by the rise in the short-term interest rate. This has consequences for the interpretation of money growth as an input for monetary policy decisions.

Suggested Citation

  • Blaes, Barno, 2009. "Money and monetary policy transmission in the euro area: evidence from FAVAR- and VAR approaches," Discussion Paper Series 1: Economic Studies 2009,18, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdp1:200918
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    References listed on IDEAS

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    1. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 2003. "Do financial variables help forecasting inflation and real activity in the euro area?," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1243-1255, September.
    2. Jörg Breitung & Sandra Eickmeier, 2006. "Dynamic factor models," AStA Advances in Statistical Analysis, Springer;German Statistical Society, vol. 90(1), pages 27-42, March.
    3. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
    4. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
    5. McCallum, Andrew & Smets, Frank, 2007. "Real wages and monetary policy transmission in the euro area," Kiel Working Papers 1360, Kiel Institute for the World Economy (IfW).
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    Cited by:

    1. Kashif Munir & Abdul Qayyum, 2014. "Measuring the effects of monetary policy in Pakistan: a factor-augmented vector autoregressive approach," Empirical Economics, Springer, vol. 46(3), pages 843-864, May.
    2. Potjagailo, Galina, 2017. "Spillover effects from Euro area monetary policy across Europe: A factor-augmented VAR approach," Journal of International Money and Finance, Elsevier, vol. 72(C), pages 127-147.
    3. Rita Soares, 2013. "Assessing monetary policy in the euro area: a factor-augmented VAR approach," Applied Economics, Taylor & Francis Journals, vol. 45(19), pages 2724-2744, July.
    4. repec:eee:jbfina:v:86:y:2018:i:c:p:1-20 is not listed on IDEAS

    More about this item

    Keywords

    Monetary policy transmission; FAVAR; VAR; money stock; euro area.;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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