The Monetary Transmission Mechanism: Evidence from the G-7 Countries

26 Pages Posted: 13 Dec 2005

See all articles by Stefan Gerlach

Stefan Gerlach

Central Bank of Ireland; Centre for Economic Policy Research (CEPR)

Frank Smets

European Central Bank (ECB); KU Leuven - Center for Economic Studies

Date Written: April 1995

Abstract

In this paper we compare the effects of monetary policy on output and prices in the G-7 countries using a parsimonious macroeconometric model comprising, output, prices and a short-term interest rate. We identify monetary policy shocks by assuming that they do not affect real output instantaneously (within the quarter) or in the long run and implement these restrictions using a sequential instrumental variables technique. We show that the so-called price-puzzle which has been noticed in the large VAR-literature in which only shortrun restrictions are used, disappears. This suggests that the puzzle is due to the fact that the use of only short-run identifying restrictions does not properly discriminate between contractionary aggregate supply shocks and monetary policy shocks. We conclude that the effects of a standardised monetary policy action are very similar across countries.

Suggested Citation

Gerlach, Stefan and Smets, Frank, The Monetary Transmission Mechanism: Evidence from the G-7 Countries (April 1995). BIS Working Paper No. 26, Available at SSRN: https://ssrn.com/abstract=868427 or http://dx.doi.org/10.2139/ssrn.868427

Stefan Gerlach (Contact Author)

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2
Ireland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Frank Smets

European Central Bank (ECB) ( email )

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D-60311 Frankfurt am Main
Germany
+49 69 1344 6550 (Phone)
+49 69 1344 6575 (Fax)

KU Leuven - Center for Economic Studies ( email )

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Leuven, B-3000
Belgium

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