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

 
Author/Editor: di Giovanni, Julian ; McCrary, Justin ; von Wachter, Till
 
Publication Date: April 01, 2005
 
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Summary: 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.
 
Series: Working Paper No. 05/86
Subject(s): Monetary policy | Germany | Fund | Interest rates

Author's Keyword(s): Monetary policy | forward looking bias | instrumental variables
 
English
Publication Date: April 01, 2005
ISBN/ISSN: 1934-7073 Format: Paper
Stock No: WPIEA2005086 Pages: 39
Price:
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