Measuring Monetary Conditions in Europe: Use and Limitations of the MCI
22 Pages Posted: 3 Jun 2011 Last revised: 29 Aug 2011
Date Written: April 31, 1999
Abstract
The monetary conditions index is a composite index of interest and exchange rates frequently used by central banks, the International Monetary Fund, and the Organisation for Economic Cooperation and Development. This paper considers the benefits and weaknesses of the monetary conditions index in the light of large macroeconometric models. It follows that the impact of the exchange rate on gross domestic product relative to the impact of the short-term interest rate is substantially lower under a monetary union. For most countries, including a long-term interest rate only affects the level of the monetary conditions index and not its turning points.
Keywords: monetary conditions, exchange rates, interest rates, monetary policy, macroeconometric model
JEL Classification: E4, E5
Suggested Citation: Suggested Citation