Essays on the transmission mechanism of monetary policy
Chapter 1: The monetary version of the sticky price intertemporal model of Obstfeld and Rogoff (1995, 1996), in which unexpected and expansive monetary shocks unambiguously generate a permanent nominal exchange rate depreciation and a temporary current account surplus, is outlined. After discussing some extensions of the basic model and verifying the lack of robustness of the main theoretical predictions to the introduction of alternative assumptions, the chapter provides an empirical investigation of the role of nominal disturbances for current account and real exchange rate fluctuations within a structural VAR approach for 15 OECD countries over the period 1979-1998, using the long-run restriction identification scheme suggested by Clarida and Gali (1994). The main empirical findings suggest that nominal shocks tend to have a significant role in generating temporary current account surpluses and that these effects are proportional to the degree of openness of the country. Chapter 2: Housing systems, as a major sector of industrialised economies, might have profound effects on the transmission mechanism of monetary shock. Despite a progressive convergence, however, EU countries still differ significantly in their housing and credit market institutions. This chapter provides a theoretical discussion of the ‘housing market’ channels of the monetary transmission mechanism (MTM) and offers some evidence on institutional differences across EU countries. Using recursive and semi-structural VARs, the role of house prices in the MTM is then assessed in eight European countries over the pre-EMU period. Results show a different degree of sensitivity of house prices, partly consistent with the institutional features of the European housing systems. The importance of these policy-induced changes in house prices to the transmission of monetary shocks to private consumption are then investigated. The chapter provides some support for the view that the house price channel may be an important source of MTM to consumption in those economies where housing and mortgage markets are relatively more developed and competitive. Chapter 3: This chapter extends the existing cross-country housing empirical literature focusing on the main fundamental factors affecting house price dynamics in a number of ways. First, through the implementation of seemingly unrelated regression (SUR) techniques and heterogeneous panel estimation methods, it is shown that European house prices are asymmetrically affected by real and financial variables. Subsequently, using a recent dataset, which collects quarterly information on housing and mortgage markets of EU countries, separate house price equations are estimated within an unrestricted error correction mechanism (ECM) approach for eleven European economies over the period 1980-2001. Results show that European house prices are driven by similar factors, but that their relative importance differs very significantly across countries. In particular, while real income is this single most important determinant of real house prices, financial effects play a relatively more important role in those countries that experienced a higher degree of financial liberalisation.