title: Essays in contemporary monetary policy: Structural change, institutional reforms and interdependence
Creators: name: Trecroci, Carmine
Publisher: name: University of Glasgow
Year: 2000
Subjects: subject: Finance.

description: The four essays within this study investigate a series of issues recently emerged in monetary theory and policy. While the common theme is the empirical evaluation of the effects of structural change and institutional reforms, the perspective from which I study this problem markedly varies across the chapters. The first two chapters of the thesis are more closely related. In the first chapter, I derive and estimate interest rate reaction functions for the G-3 economies and four inflation-targeting countries, to assess whether policy behaviour in these economies has significantly changed in recent years. Contrary to a commonly stated view, some interesting differences emerge amongst the policy rules followed by the central banks in the G-3 economies. Furthermore, the adoption of inflation targets and the move to greater central bank independence in the second group of countries do not seem to have significantly altered the way in which monetary authorities react to final policy objectives. In the second chapter, I apply the same econometric methodology to an optimal interest rate rule derived for four former ERM -now EMU- countries. The existence of the exchange rate constraint permits to draw, inter alia, some empirically testable hypotheses about the effects of fiscal policy credibility on interest rate determination. My findings show that some of the economies faced, on their road to EMU, remarkable costs in achieving nominal convergence with Germany, mainly due to the presence of concerns on the sustainability of their fiscal stances. The third chapter conducts an empirical investigation on the leading indicator properties of broad monetary aggregates for future inflation in the euro area. Using aggregate data for the area, I first test for Granger non-causality of M3 on prices, and then estimate a series of forecasting equations for inflation. My findings suggest that the information content of monetary aggregates, but also of the term spread and the output gap, is helpful for forecasting the behaviour of future inflation in the area. To this purpose, however, the joint use of information obtained from monetary models as the one adopted in this exercise, and from other, more "structural" models of the euro area, appears a superior forecasting strategy. Finally, chapter four adopts a time-varying VAR perspective to obtain a tentative attribution of observed fluctuations of the bilateral real exchange rates between the USA, the UK and Italy, to shocks in relative productivity levels and the fiscal position. A Kalman filter approach is employed to assess the changing contributions of each of these variables, and of shocks to the monetary stance, to the behaviour of real exchange rates over the last 130 years. While confirming the relevance of fiscal shocks in triggering observed deviations of the exchange rate from PPP, the study finds little evidence in favour of persistent productivity effects on the real exchange rate. Moreover, the exchange rate regime in place plays a substantial role in determining how shocks are transmitted to the real exchange rate.