Abstract
This study measures the degree of de-facto monetary policy independence of a national central bank. This measurement might allow a central bank to assess the gains and losses in sovereign affecting the national money market when the country’s own currency is given up and a common one is adopted. The study applies a multivariate GARCH-model to the money market rates of six members of the European Union (EU) that have not adopted the common currency. It finds that the central banks of Sweden, Romania, and Poland would not lose considerable de-facto independence by adopting the euro. Their daily money market rates co-move strongly with the euro money market rates, which is a sign of already low monetary policy dependence despite floating exchange rates. This result confirms other research with co-integration techniques, although the coefficients of co-movement with the euro money market are lower in the present study. Lower coefficients can be explained by the impact of non-mean reverting money market rates after heavy shocks in turbulent market periods, which slacken the co-movement ties. The opposite results were obtained for the central banks of the UK, the Czech Republic and Hungary. Hungary is a problematic case: notwithstanding a low co-movement of money market rates with the euro market rates, the almost explosive volatility of money market rates after a shock signals a very poor effectiveness of monetary policy.
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Notes
Denmark is a member of the Exchange Rate Mechanism (ERM) of the monetary union with a band of ±15 % around the central parity. This restriction on monetary independence could impair the comparison of regression results among countries. Therefore, the country is excluded from this study.
Robor is completely from the Romanian National Bank, and an update of Stibor from the Swedish Riksbank. In these cases, the time observations had to be adjusted to receive continues time orders for GARCH regressions. The value of the last working day has been used for bank holidays.
Of course, I have to acknowledge that the Euribor is not necessarily the lead rate of the Libor—it could be quite the opposite relationship. For all other money markets it seems plausible to understand the euro as the lead currency.
The regression equation has been expanded by lagged Euribor variables.
There might be some undetected multicollinearity between the accession and the float dummy.
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Acknowledgments
The author would like to thank Herbert S. Buscher, Lucjan T. Orlowski and an anonymous referee for useful comments. The article has also benefitted from comments at presentation at the 2014 conference of the Austrian Economic Association in Vienna and at the 2014 Infiniti conference on international finance Prato, Italy. All remaining errors are the responsibility of the author.
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Gabrisch, H. Monetary policy independence reconsidered: evidence from six non-euro members of the European Union. Empirica 44, 567–584 (2017). https://doi.org/10.1007/s10663-016-9337-3
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DOI: https://doi.org/10.1007/s10663-016-9337-3