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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
Authorized for Distribution: April 1, 2005
Electronic Access: Free Full Text (PDF file size is 594KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

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  
    Published:   April 1, 2005        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA2005086   Pages:   39
    Price:   US$15.00
       
     
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