2 - The transmission of monetary shocks in the euro area: a VAR analysis based on euro-wide data

Wetenschappelijke publicatie
Date 1 January 2000

Using area-wide data, we perform a VAR analysis to simulate the responses of inflation and real output following monetary shocks in the EMU. We find that short-term interest rate shocks have a significant impact on real activity, but hardly on prices. M3 shows a perverse short-term response to a monetary contraction, which should be taken into account when interpreting the reference value of money growth (the ‘first pillar’ of the Eurosystem’s monetary strategy). Shocks to the effective exchange rate have a rapid impact on prices, money growth and real activity. As the exchange rate itself is hardly affected by monetary policy shocks, though, there is little scope for an exchange rate policy. Rather, these findings underscore the important role that the exchange rate should play as an information variable within the ‘second pillar’ of the monetary strategy. Finally, a comparison with the United States reveals that most impulse-responses are similar. This paper was largely written while Pattanaik was an intern at De Nederlandsche Bank. We would like to thank Jan Marc Berk, Paul Cavelaars, Aerdt Houben and Job Swank for useful comments on an earlier version, and Martin Admiraal and Frans Vermeer for statistical assistence. Errors are ours. The views expressed in this paper do not necessarily reflect those of De Nederlandsche Bank or of the Reserve Bank of India.