Working Paper: CEPR ID: DP17587
Authors: Alan M. Taylor; James S. Cloyne; Patrick Hrtgen
Abstract: Identifying exogenous variation in monetary policy is crucial for investigating central bank policy transmission. Using newly-collected archival real-time data utilized by the Central Bank Council of the German Bundesbank, we identify unexpected changes in German monetary policy from 580 policy meetings between 1974 and 1998. German monetary policy shocks produce conventional effects on the German domestic economy: activity, prices, and credit decline significantly following a monetary contraction. But given Germany’s central role in the European Monetary System (EMS), we can also shed light on debates about the international transmission of monetary policy and the relative importance of the U.S. Federal Reserve for the global cycle during these years. We find that Bundesbank policy spillovers were much stronger in major EMS economies with Deutschmark pegs than in non-EMS economies with floating exchange rates. Furthermore, compared to monetary spillovers from the U.S., German spillovers were comparable or even larger in magnitude for both pegs and floats.
Keywords: Bundesbank; Monetary Policy; Trilemma; Exchange Rates; Spillovers
JEL Codes: E32; E52; F42; F44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Contractionary monetary policy shock (increase in policy interest rate) (E49) | Decline in economic activity in Germany (N14) |
| Contractionary monetary policy shock (increase in policy interest rate) (E49) | Rise in unemployment in Germany (F66) |
| Contractionary monetary policy shock (increase in policy interest rate) (E49) | Decrease in consumer prices in Germany (E31) |
| German monetary policy shocks (E58) | Stronger spillover effects on countries with Deutsche Mark pegs (F31) |
| German monetary policy shocks (E58) | Spillover effects on economies with floating exchange rates (F41) |
| Comparison of German monetary policy spillovers to US Federal Reserve spillovers (E52) | German spillovers are comparable or larger in magnitude for European economies (F69) |