547 - Monetary Conditions in Europe: a methodologic analysis

Wetenschappelijke publicatie
Date 14 July 1998

Recent studies criticise the construction of a Monetary Conditions Index (MCI), a composite index of interest and exchange rates frequently published by (central) banks, IMF and OECD. Instead of estimating the weights of this index by means of simple IS-curves, this paper investigates interest and exchange rates effects on real GDP on the basis of large macroeconometric models for some European countries and the European Economic and Monetary Union. Under a monetary union the impact of the exchange rate on GDP relative to that of the short-term interest rate is substantially lower than without this union. Furthermore the inclusion of a long-term interest rate in the MCI is investigated. From the analyses emerges that for most countries this affects only the level of the MCI but not the turning points. Keywords: Monetary Conditions Index, EMU (Published in De Economist, 147 (2), pp.184-203)