Discussion paper

DP2079 Measuring Monetary Policy in Open Economies

The empirical VAR literature on the monetary transmission mechanism in
open economies has not yet provided a commonly accepted solution to the
problem of simultaneity between interest rates and the exchange rate. In
this paper we propose to solve the identification problem by using
information extracted from financial markets independently from the VAR to
measure monetary policy shocks. We also evaluate the relative importance of
macroeconomic and monetary policy variables in explaining short-term
fluctuations in the nominal exchange rate. Our main results are that the
simultaneity between German policy rates and the US\ dollar/D Mark exchange
rate is not an empirically relevant problem, and that monetary variables
are dominated by macroeconomic factors in the explanation of exchange rate


Favero, C, F Bagliano and F Franco (1999), ‘DP2079 Measuring Monetary Policy in Open Economies‘, CEPR Discussion Paper No. 2079. CEPR Press, Paris & London. https://cepr.org/publications/dp2079