Following Germany's Lead: Using International Monetary Linkages to Identify the Effect of Monetary Policy on the Economy

40 Pages Posted: 3 Mar 2006

See all articles by Julian di Giovanni

Julian di Giovanni

Universitat Pompeu Fabra - Department of Economics and Business; Barcelona Graduate School of Economics (Barcelona GSE); CREI and Universitat Pompeu Fabra; Centre for Economic Policy Research (CEPR)

Justin McCrary

Columbia University - Law School; National Bureau of Economic Research (NBER)

Till von Wachter

Columbia Business School - Economics Department; IZA Institute of Labor Economics

Date Written: April 2005

Abstract

Forward-looking behavior on the part of the monetary authority leads least squares estimates to understate the true growth consequences of monetary policy interventions. We present instrumental variables estimates of the impact of interest rates on real output growth for several European countries, using German interest rates as the instrument. We show that the difference between least squares and instrumental variables estimates provides bounds for the degree of endogeneity in monetary policy. The results confirm a considerable downward bias of estimates that do not account for potential forward-looking monetary policy decisions. The bias is higher for countries whose monetary policy was more independent of Germany.

Keywords: Monetary policy, forward looking bias, instrumental variables

JEL Classification: E52, J60

Suggested Citation

di Giovanni, Julian and McCrary, Justin and von Wachter, Till, Following Germany's Lead: Using International Monetary Linkages to Identify the Effect of Monetary Policy on the Economy (April 2005). IMF Working Paper, Vol. , pp. 1-40, 2005. Available at SSRN: https://ssrn.com/abstract=888132

Julian Di Giovanni (Contact Author)

Universitat Pompeu Fabra - Department of Economics and Business ( email )

Barcelona
Spain

HOME PAGE: http://julian.digiovanni.ca

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

HOME PAGE: http://julian.digiovanni.ca

CREI and Universitat Pompeu Fabra ( email )

HOME PAGE: http://julian.digiovanni.ca

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

HOME PAGE: http://julian.digiovanni.ca

Justin McCrary

Columbia University - Law School ( email )

435 West 116th Street
New York, NY 10025
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Till Von Wachter

Columbia Business School - Economics Department ( email )

420 West 118th Street
New York, NY 10027
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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