Measuring Monetary Policy in Open Economies

IGIER Working Paper No. 133

Posted: 24 Aug 1998

See all articles by Carlo A. Favero

Carlo A. Favero

Bocconi University - Department of Finance; Centre for Economic Policy Research (CEPR)

Fabio C. Bagliano

University of Turin - Department of Economics and Statistics; Center for Research on Pensions and Welfare Policies (CeRP); University of Turin - Collegio Carlo Alberto

Francesco Franco

affiliation not provided to SSRN

Date Written: July 1998

Abstract

The empirical VAR literature on the monetary transmission mechanism in closed economies has been successful in providing evidence with which theoretical models of the monetary transmission mechanism are now confronted. The empirical VAR literature on the monetary transmission mechanism in open economies has not enjoyed the same success and it is still marred with a number of empirical puzzles. In this paper we firstly assess the relevance of the progress made estimating VAR in closed economies for the specification of VAR in open economies. Second, we propose to solve the simultaneity between exchange rate and policy interest rates by using information extracted from financial markets independently from the VAR. Lastly, we evaluate the relative importance of macroecomnomic and monetary policy variables in explaining short-term fluctuations in the nominal exchange rates. Our main results are that a commodity price index is an important variable in any VAR analysis of the monetary transmission mechanism, that the simultaneity between German policy rates and the US dollar/D mark exchange rate is not an empirically relevant problem, and that monetary factors are dominated by macroeconomic factors for the explanation of exchange rate fluctuations.

JEL Classification: E44, E52, F41

Suggested Citation

Favero, Carlo A. and Bagliano, Fabio C. and Franco, Francesco, Measuring Monetary Policy in Open Economies (July 1998). IGIER Working Paper No. 133, Available at SSRN: https://ssrn.com/abstract=111888

Carlo A. Favero (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

HOME PAGE: http://www.igier.unibocconi.it\favero

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Fabio C. Bagliano

University of Turin - Department of Economics and Statistics ( email )

C. so Unione Sovietica, 218 Bis
Torino, I-10134
Italy
+39 011 670 6084 (Phone)
+39 011 670 6062 (Fax)

HOME PAGE: http://web.econ.unito.it/bagliano

Center for Research on Pensions and Welfare Policies (CeRP) ( email )

Via Real Collegio, 30
Moncalieri, Turin 10024
Italy

University of Turin - Collegio Carlo Alberto ( email )

via Real Collegio 30
Moncalieri, Torino 10024
Italy

Francesco Franco

affiliation not provided to SSRN

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