544 - Monetary transmission and controllability of money in Europe: a structural vector error correction approach

Wetenschappelijke publicatie
Date 16 June 1998

In this paper, a structural vector error correction model (S-VECM) is estimated to investigate three essential prerequisites for a successful monetary targeting strategy: stability, controllability and predictability. First, multivariate cointegration techniques are used to identify two cointegration relations, that are identified as a long run money demand function and the Fisher effect for the long-term interest rate. Identification of the structural model is achieved by imposing contemporaneous and long-term restrictions. It is found that an interest rate shock hardly affects the nominal money stock, whereas the effects on excess money holdings and inflation are negative, but not significant. Keywords: controllability, money demand, generalized common trends model JEL codes: C32, E41, E52 (Published as DNB-Staff Report no. 36)