EUROPEAN CENTRAL BANK WORKING PAPER SERIES E C B E Z B E K T B C E E K P WORKING PAPER NO. 91 THE MONETAR ARY TRANSMISSION MECHANISM IN THE EURO AREA: MORE EVIDENCE FROM VAR ANALYSIS EUROSYSTEM MONETARY TRANSMISSION NETWORK BY GERT T PEERSMAN AND FRANK SMETS December 2001
EUROPEAN CENTRAL BANK WORKING PAPER SERIES WORKING PAPER NO. 91 THE MONETAR ARY TRANSMISSION MECHANISM IN THE EURO AREA: MORE EVIDENCE FROM VAR ANALYSIS * EUROSYSTEM MONETARY TRANSMISSION NETWORK BY GERT PEERSMAN AND FRANK SMETS December 2001 * Ger Peersman: Ghen Universiy, e-mail: Ger.Peersman@rug.ac.be. Frank Smes: European Cenral Bank, e:mail: Frank.Smes@ecb.in. This paper was prepared in he conex of he ECB s Moneary Transmission Nework. We hank he members of he MTN and in paricular Don Bredin for valuable inpu. Ger Peersman worked on his paper while being in he ECB s Graduae Research Programme.
The Eurosysem Moneary Transmission Nework This issue of he ECB Working Paper Series conains research presened a a conference on Moneary Policy Transmission in he Euro Area held a he European Cenral Bank on 18 and 19 December 2001. This research was conduced wihin he Moneary Transmission Nework, a group of economiss affiliaed wih he ECB and he Naional Cenral Banks of he Eurosysem chaired by Ignazio Angeloni. Anil Kashyap (Universiy of Chicago) aced as exernal consulan and Benoî Mojon as secreary o he Nework. The papers presened a he conference examine he euro area moneary ransmission process using differen daa and mehodologies: srucural and VAR macro-models for he euro area and he naional economies, panel micro daa analyses of he invesmen behaviour of non-financial firms and panel micro daa analyses of he behaviour of commercial banks. Ediorial suppor on all papers was provided by Briony Rose and Susana Sommaggio. T his paper can be downloaded free of charge from he Social Science Research Ne work a: hp://ssrn.com/absrac=356269 als o a he European Cenral Bank a: www.ecb.in European Cenral Bank, 2001 Address Kaisersrasse 29 D-60311 Frankfur am Main Germany Posal address Posfach 16 03 19 D-60066 Frankfur am Main Germany Telephone +49 69 1344 0 Inerne hp://www.ecb.in Fax +49 69 1344 6000 Telex 411 144 ecb d All righs reserved. Reproducion for educaional and non-commercial purposes is permied provided ha he source is acknowledged. The views expressed in his paper are hose of he auhors and do no necessarily reflec hose of he European Cenral Bank. ISSN 1561-0810
Conens Absrac 4 Non-echnical summary 5 1 Inroducion 7 2. A VAR-model for he euro area 8 2.1. The benchmark specificaion 8 2.2. Basic esimaion resuls 9 3. A robusness analysis 14 3.1. Sabiliy of he impulse responses over ime 14 3.2. Alernaive idenificaion schemes 15 4. The effec of moneary policy on oher macro variables 20 4.1. The exended model 20 4.2. Componens of GDP 20 4.3. Moneary variables and asse prices 22 4.4. Labour marke variables 24 4.5. Individual counry effecs 25 5. Concluding remarks 27 References 28 European Cenral Bank Working Paper Series 30 ECB Working Paper No 91 December 2001 3
Absrac This paper applies he idenified VAR mehodology o synheic euro area daa from 1980 ill 1998 o sudy he macro-economic effecs of an unexpeced change in moneary policy in he euro area. The focus is on he area-wide moneary ransmission. I is shown ha he overall macroeconomic effecs of a moneary policy shock in he euro area are very similar o hose esimaed for he Unied Saes and are surprisingly sable over ime. In addiion, he paper conains a number of robusness checks wih alernaive idenificaion schemes and examines how various real and financial variables (such as he GDP or money componens) respond o an area-wide moneary policy impulse. JEL classificaion: E52 Key words: Moneary Transmission Mechanism; Vecor Auoregressions 4 ECB Working Paper No 91 December 2001
Non-echnical summary There is a large lieraure ha has used idenified Vecor Auoregressions (VARs) o sudy he macroeconomic effecs of an unexpeced change in policy-conrolled ineres raes in he Unied Saes and in he euro area counries. Recenly, Leeper, Sims and Zha (1998) and Chrisiano, Eichenbaum and Evans (2000) have reviewed wha one has learned from his exensive lieraure regarding he moneary ransmission mechanism in he Unied Saes. A large par of he lieraure on he euro area has focused on rying o idenify cross-counry differences. In hese sudies, VARs are esimaed for he individual counries of he euro area, and he impulse responses of he main macroeconomic variables o a moneary policy shock are compared. The focus of his paper is on wha we can learn regarding he area-wide moneary ransmission from analysing a VAR esimaed on synheic euro area daa from 1980 ill 1998. Using several sandard idenificaion schemes, we uncover plausible impulse responses of he main macro-economic variables o an unexpeced moneary policy ighening in he euro area. A emporary rise in he nominal and real shor-erm ineres rae ends o be followed by a real appreciaion of he exchange rae and a emporary fall in oupu. Prices are more sluggish and only sar o fall significanly below zero several quarers afer GDP. These resuls are very similar o hose obained for he US economy using similar mehodologies. More surprisingly, hey also appear o be sable over differen sample periods. We also invesigae he reacion of oher macro variables and he GDP componens o a moneary policy shock. The response of oupu is mainly due o a decrease in invesmen which responds wih a magniude hree imes as large as GDP, and o a lesser exen in privae consumpion. Employmen falls in line wih GDP, bu less srongly which resuls in a procyclical response of labour produciviy. We find an immediae liquidiy effec on M1, bu a more gradual decrease of M3 and oher credi aggregaes. The long-erm ineres rae shows a mued response o he emporary rise in he shor-erm ineres rae consisen wih he expecaions heory of he erm srucure. Share prices fall significanly on impac, while house prices respond more sluggishly. Overall, hese findings are encouraging and show in our view ha he resuls from applying sandard echniques o synheic euro area daa can be used as a benchmark for he furher heoreical and empirical analysis of he ransmission mechanism in he euro area. Of course, he caveas ha come wih his analysis are even more imporan in his case. In paricular, we ECB Working Paper No 91 December 2001 5
know ha here was no common moneary policy in he euro area over he esimaion period, so ha idenifying moneary policy innovaions on he basis of an aggregae moneary policy reacion funcion may be problemaic. I is herefore imporan o monior how hese resuls change as daa from he new single moneary policy regime come in. In addiion, he aggregae analysis resuls need o be complemened wih a more disaggregaed invesigaion ha akes he feaures of he naional moneary policy regimes ino accoun. Recen work in ha respec can be found in Sala (2001), Rebucci and Ciccarelli (2001) and Mojon and Peersman (2001). 6 ECB Working Paper No 91 December 2001
1. Inroducion There is a large lieraure ha has used idenified Vecor Auoregressions (VARs) o sudy he macroeconomic effecs of an unexpeced change in policy-conrolled ineres raes in he euro area counries. 1 The use of VARs for he analysis of moneary policy sared wih he seminal work of Sims (1980). Recenly, Leeper, Sims and Zha (1998) and Chrisiano, Eichenbaum and Evans (2000) have reviewed wha one has learned from his exensive lieraure regarding he moneary ransmission mechanism in he Unied Saes. A large par of he lieraure on he euro area has focused on rying o idenify cross-counry differences. In hese sudies, VARs are esimaed for he individual counries of he euro area, and he impulse responses of he main macroeconomic variables o a moneary policy shock are compared. The focus of his paper is on wha we can learn regarding he area-wide moneary ransmission from analysing a VAR esimaed on synheic euro area daa from 1980 ill 1998. In he nex secion, we show ha using a sandard idenificaion scheme as in Chrisiano, Eichenbaum and Evans (2000) and Eichenbaum and Evans (1995) delivers plausible esimaes of he effecs of moneary policy in he euro area. An unexpeced, emporary rise in he shor-erm ineres rae ends o be followed by a real appreciaion of he exchange rae and a emporary fall in oupu afer wo quarers. The effec on oupu reaches a peak afer 3 o 5 quarers, afer which i slowly reurns o baseline. Prices are more sluggish and only sar o fall significanly below zero several quarers afer GDP. The effec on prices is also more persisen. In Secion 3 we perform a number of robusness checks. We show ha he impulse responses o a moneary policy shock are relaively sable over ime. The resuls also appear robus o alernaive idenificaion schemes, similar o he ones used in Gali (1992) and Sims and Zha (1997). In Secion 4, we use he VAR o examine how he various money, credi and GDP componens respond o an area-wide moneary policy impulse, as well as some asse prices and labour marke variables. Finally, in Secion 5 we discuss he conclusions. 1 For a recen survey, see, for example, Guiso e al (2000). ECB Working Paper No 91 December 2001 7
2.1. The benchmark specificaion 2. A VAR-model for he euro area In his secion we describe wo benchmark VAR-models ha we use o analyse he effecs of a moneary policy shock in he euro area. The benchmark VARs have he following represenaion: [1] Y A( L) Y 1 B( L) X where Y is he vecor of endogenous euro area variables and is a vecor of exogenous foreign variables. Throughou his paper, he vecor of exogenous variables conains a US world commodiy price index ( cp ), US real GDP ( y ), and he US shor-erm nominal US 2 ineres rae ( ): s US US [2] X cp y s ' These variables are included o conrol for changes in world demand and inflaion. The inclusion of hese variables helps o solve he so-called price puzzle (i.e. he empirical finding in he VAR lieraure ha prices rise following an ineres rae ighening). 3 By reaing hese variables as exogenous, we implicily assume ha here is no feedback from he euro area variables o he foreign variables. 4 We also allow for a conemporaneous impac of he exogenous variables on he endogenous euro area variables. In he firs model, he vecor of endogenous euro area variables, Y, consiss of real GDP ( y ), consumer prices ( p ), he domesic nominal shor-erm ineres rae ( s ) and he 5 real effecive exchange rae ( ): x [3] Y ' y p s x In he second model, we also include a broad moneary aggregae (M3) ( ) in he block of endogenous variables. Hisorically money developmens have played an imporan role in he moneary policy sraegies of some of he counries now paricipaing in he moneary union. The inclusion of a money aggregae could herefore be helpful in X m 2 3 4 5 Each of he VAR models also conains a consan and a linear rend. For example Sims (1992). The resuls are very similar when such a feedback is allowed. Mos of he daa used in his paper come from he AWM daabase. See Fagan e al (2001). 8 ECB Working Paper No 91 December 2001
idenifying moneary policy innovaions. In his case, he vecor of endogenous variables can hus be wrien as: [3 ] Y ' y p m s x In boh cases, he euro area moneary policy shock is idenified hrough a sandard Choleski-decomposiion wih he variables ordered as in [3] and [3 ]. 6 The underlying assumpion is ha policy shocks have no conemporaneous impac on oupu, prices and money, bu may affec he exchange rae immediaely. However, he policy ineres rae does no respond o conemporaneous changes in he effecive exchange rae. The laer assumpion is appropriae for a large, relaively closed, economy such as he euro area as a whole. 7 In secion 3, we provide a robusness analysis for alernaive idenificaion sraegies. Unless oherwise menioned, each of he VAR-models is esimaed in levels using quarerly daa over he period 1980-1998. 8 In his paper we do no perform an explici analysis of he long run behaviour of he economy. By doing he analysis in levels we allow for implici coinegraing relaionships in he daa. A more explici analysis of he long-run behaviour of he various variables is limied by he relaively shor sample available. 9 The daa are expressed in logs and seasonally adjused, excep he ineres raes which are in levels. We use he hree-monh ineres rae as he moneary policy rae as his is he only shor-erm ineres rae ha is available for all counries over he whole sample period. Sandard likelihood raio ess are used o deermine he lag-order of he VARs, which urns ou o be of order hree. Finally, in order o es he sabiliy of he VAR, we ran sequenial Chow break ess saring in 1990:1. There is no evidence of insabiliy a he 5% confidence level. 2.2. Basic esimaion resuls The resuls of he wo benchmark VAR-models for he euro area are shown in he firs wo columns of Graph 1. This graph gives he effec of a domesic, one-sandard deviaion, moneary policy shock on domesic real GDP, domesic consumer prices, he exchange 6 7 8 9 As in Sims (1980) and Chrisiano e al (1998). Eichenbaum and Evans (1995) make he same assumpion for he US. One can argue ha he euro area as a whole is more like he US in erms of openness han like any of is individual members. We ook 1980 as a saring dae because some of he daa series used are only available from ha year. See Sims e al (1990). Coenen and Vega (1999) esimae a VECM model for he euro area. ECB Working Paper No 91 December 2001 9
rae and he domesic shor-erm ineres rae, ogeher wih a 90 percen confidence band. 10 The hird column repors he resuls of a similar exercise for US daa. The main difference wih he VAR specificaion for he euro area is ha in his case we do no include exogenous variables. Moreover, consisen wih many oher papers on he US (e.g. Chrisiano, Eichenbaum and Evans (2000)), we include commodiy prices as an ' endogenous variable, YUS, cp y p s x. The sample period is idenical (1980-1998) and he idenificaion of he US moneary policy shock is again obained using a sandard Choleski-decomposiion. The impulse response paerns repored in he graph are broadly in line wih he exising empirical evidence for he Unied Saes and many oher counries (Chrisiano e al, 2000; Gerlach and Smes, 1995). An unexpeced, emporary rise in he shor-erm ineres rae ends o be followed by a real appreciaion of he exchange rae and a emporary fall in oupu afer wo quarers. The effec on oupu reaches a peak afer 3 o 5 quarers and reurns o baseline aferwards. Prices respond much more sluggishly, bu he effecs of he policy shock are more persisen. A comparison of he firs and second column of Graph 1 shows ha overall he resuls obained in he euro area models wih and wihou money are very similar. The inclusion of M3 (model 2) does lead o somewha igher esimaes. The effec of he policy shock on prices is now significan afer eigh quarers. Also, he iniial posiive impac on oupu disappears. In wha follows we will herefore use he model wih money as our benchmark for he euro area. An analysis of how M3 and is componens are affeced is given in Secion 4.3 below. Comparing he effecs in he euro area and he Unied Saes, i is sriking how similar he impulse response funcions are. A ypical moneary policy shock is somewha greaer in he US han in he euro area (45 basis poins compared o 30 basis poins), which is refleced in a somewha sronger impac on oupu and prices. The impac on prices is, however, much faser in he US. One explanaion for his finding could be ha prices are more flexible in he US. The slower response of prices in he euro area may, however, also be due o aggregaion bias, which given he heerogeneiy of inflaion raes in he individual counries of he euro area could be mos severe for prices. The impac on he 10 The confidence band is obained hrough a sandard boosrapping procedure wih 100 draws. Very similar, hough somewha wider, confidence bands are obained when Mone Carlo mehods are used. See Sims and Zha (1999). 10 ECB Working Paper No 91 December 2001
real effecive exchange rae is much smaller, bu more persisen in he US, which is somewha consisen wih he findings of Eichenbaum and Evans (1995). Graph 1 The effecs of a moneary policy shock in he euro area and he Unied Saes (Esimaion period: 1980-1998) 0.15 Oupu-Mod1 0.15 Oupu-Mod2 0.15 Oupu-US 0.10 0.10 0.10 0.05 0.05 0.05 - - - -0.05-0.05-0.05-0.10-0.10-0.10-0.15-0.15-0.15-0.20-0.20-0.20-0.25-0.25-0.25-0.30 quarer -0.30 quarer -0.30 quarer 0.10 Prices-Mod1 0.10 Prices-Mod2 0.10 Prices-US 0.05 0.05 0.05 - - - -0.05-0.05-0.05-0.10-0.10-0.10-0.15-0.15-0.15-0.20-0.20-0.20-0.25 quarer -0.25 quarer -0.25 quarer 0.7 Ineres-rae-Mod1 0.7 Ineres-rae-Mod2 0.7 Ineres-rae-US 0.6 0.6 0.6 0.5 0.5 0.5 0.4 0.4 0.4 0.3 0.3 0.3 0.2 0.2 0.2 0.1 0.1 0.1 0.0 0.0 0.0-0.1-0.1-0.1-0.2 quarer -0.2 quarer -0.2 quarer 1.50 Exchange-rae-Mod1 1.50 Exchange-rae-Mod2 1.50 Exchange-rae-US 1.25 1.25 1.25 1.00 1.00 1.00 0.75 0.75 0.75 0.50 0.50 0.50 0.25 0.25 0.25-0.25-0.25-0.25-0.50 quarer -0.50 quarer -0.50 quarer Noe: 90 % confidence bands. The size of he policy shock obained for he euro area is much larger han he one obained by Monicelli and Trisani (1999), who use a longer esimaion period and an idenificaion sraegy ha combines boh shor and long-run resricions. These auhors find ha a one sandard deviaion moneary shock corresponds o a 10 basis poins move in he ineres rae. The maximum impac of his shock on GDP is, however, much larger a 0.4 percen. ECB Working Paper No 91 December 2001 11
Graph 2 shows he hisorical conribuion of he moneary policy shocks o he shor-erm ineres rae in he euro area and he US, whereas Table 1 provides he conribuion of he moneary policy shocks o he variance of he forecas error of oupu, prices, he ineres rae and he exchange rae a various s. From Graph 2, i is clear ha periods of easy moneary policy in he euro area can be siuaed a he end of 1984 and in 1991. In conras, moneary policy was on average relaively igh a he beginning of 1990 (possibly associaed wih he reunificaion of Germany) and again during he ERM crisis a he end of 1992 and he beginning of 1993. The iming of hese episodes are quie differen from hose in he Unied Saes. In fac, he correlaion coefficien beween moneary policy innovaions in he euro area and he US urns ou o be negaive in his sample period (-0.2). Graph 2 Conribuion of moneary policy shocks o he shor-erm ineres rae 2.0 Euro area 1.5 1.0 0.5 0.0-0.5-1.0-1.5-2.0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2.0 Unied Saes 1.5 1.0 0.5 0.0-0.5-1.0-1.5-2.0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 Table 1 shows ha, as in mos of he VAR lieraure, he conribuion of policy shocks o oupu and price developmens is raher limied. This is o be expeced as he moneary policy shocks capure deviaions of he shor-erm ineres rae from average moneary policy behaviour over he esimaion period. In a sable moneary policy regime such deviaions should be limied. The fac ha he conribuion of moneary policy shocks o 12 ECB Working Paper No 91 December 2001
oupu and exchange rae developmens is larger in he euro area han in he Unied Saes, is parly due o he fac ha he overall variance o be explained is smaller because of he inclusion of exogenous variables in he euro area VAR. Table 1 Conribuion of moneary policy shocks o he forecas error variance Horizon 1 year 2 year 3 year 5 year 10 year Euro area Oupu 13 28 34 39 38 Prices 3 7 11 18 23 Ineres rae 65 41 29 14 4 Exchange rae 17 21 23 27 33 Unied Saes Oupu 4 2 5 10 20 Prices 7 16 18 15 14 Ineres rae 50 25 23 21 21 Exchange rae 6 3 2 3 3 Noe: in percen. ECB Working Paper No 91 December 2001 13
3. A robusness analysis In his Secion, we analyse he robusness of he resuls described in Secion 2. Firs, we analyse he sabiliy of he impulse responses over differen sample periods (Secion 3.1). Secion 3.2 hen provides a robusness analysis for alernaive idenificaion schemes. Two alernaive sraegies are invesigaed: he Sims and Zha (1998) mehodology and an idenificaion sraegy using long-run resricions as in Gali (1992). 3.1. Sabiliy of he impulse responses over ime Using he recursive Chow ess referred o in Secion 2, he null hypohesis ha he benchmark VARs are sable over he esimaion period can no be rejeced. In order o es his furher, we repor in his Secion impulse responses for boh longer and shorer sample periods. Evidence of he sabiliy of he impulse responses over ime would sugges ha he problems due o aggregaion over differen moneary policy regimes may be overraed. The recursive impulse responses also allow us o see wheher here is any evidence ha he ransmission mechanism of moneary policy in he euro area has changed over ime. Graph 3 repors recursive impulse responses o a moneary policy shock based on model 1 for he euro area. 11 The full lines refer o sample periods ha sar in he 1970s (1973, 1975, 1977 and 1979) and end in 1998, whereas he broken lines refer o shorer sample periods ha sar in he 1980s (1981, 1983, 1985). Overall, he resuls confirm he sabiliy of he VAR resuls. The qualiaive effecs of a moneary policy shock are quie similar over he differen sample periods. There are some quaniaive differences, which are unlikely o be significan. The average size of he ineres rae shock has fallen somewha in he laer period, while he associaed exchange rae response is clearly larger. The sronger exchange rae effec is ranslaed in a smaller price puzzle in he laer period. Compared o he full sample resuls, he effec of a moneary policy shock on oupu has been quicker in he 1980s and 1990s. The peak effec akes places in he second and hird quarer, compared o he fourh and fifh quarer for he full sample. 11 We do his analysis wih he benchmark model wihou money because an area-wide money series is no available before he 1980s. 14 ECB Working Paper No 91 December 2001
Graph 3 Recursive impulse responses o a moneary policy shock in he euro area 0.070 Oupu 0.40 Shor rae 0.035 0.32 0 0.24-0.035 0.16-0.070 0.08-0.105-0.140-0.08-0.175-0.16 0.075 Prices 1.20 Exchange rae 0.050 0.025 0.80-0 -0.025 0.40-0.050-0.075-0.100-0.40-0.125-0.150-0.80 Noe: he solid lines refer o he sample periods ha sar in 1973, 1975, 1977 and 1979; he dashed lines refer o he sample periods ha sar in 1981, 1983 and 1985. In all cases, he end of he sample period is 1998:4. 3.2. Alernaive idenificaion schemes I is well-known ha impulse response funcions in VAR analysis can be sensiive o alernaive idenificaion schemes. In his Secion we apply wo alernaive idenificaion schemes o check he robusness of our previous resuls. The firs is due o Sims and Zha (1998) and Kim and Roubini (2000) and allows for a conemporaneous ineracion beween he shor-erm ineres rae, he exchange rae and he money aggregae. The second is based on Gali (1992) and uses a mixure of long and shor-run resricions o idenify moneary policy shocks. ECB Working Paper No 91 December 2001 15
3.2.1. Allowing for a conemporaneous ineracion beween he shor-erm ineres rae, he exchange rae and he money aggregae In his Secion we use a more general idenificaion mehod suggesed by Bernanke (1986) and Sims (1986) and applied by, for example, Sims and Zha (1998) and Kim and Roubini (2000). If are he residuals from he reduced form esimaion of equaion [1], hen hese residuals can be relaed o he srucural shocks by he following general srucural model: [5] A B In our basic, recursive idenificaion sraegy, A is assumed o be he ideniy marix and B is assumed o be a lower riangular marix. The policy shock hen refers o he shock o he ineres rae equaion. Following Sims and Zha (1998) and Kim and Roubini (1997), an alernaive, non-recursive idenificaion scheme allows for a conemporaneous ineracion beween he shor-erm ineres rae, money and he exchange rae. In he model wih money, hese auhors propose he following resricions on he A and B marix: [6] 1 a a 0 a 21 31 51 a a 0 1 32 0 52 a a 0 0 1 43 53 a a 0 0 34 1 54 y p m s x 0 0 0 a45 1 y p m s x The firs wo equaions represen he sluggish reacion of he real secor (oupu and prices) o shocks in he moneary secor (money, ineres rae and exchange rae). There is no conemporaneous impac of he moneary policy, money demand, and exchange rae shock on oupu and prices. The hird equaion can be inerpreed as a shor-run money demand equaion. Money demand is allowed o respond conemporaneously o innovaions in oupu, prices and he ineres rae. The fourh row represens he moneary policy reacion funcion. The moneary auhoriy ses he ineres rae afer observing he curren money sock and he exchange rae, bu does no respond conemporaneously o disurbances in oupu and he price level. The argumen is ha informaion abou he laer variables is only available wih a lag. Finally, he exchange rae, being an asse price, reacs immediaely o all he oher innovaions. Graph 4 shows ha he impulse responses obained wih his idenificaion scheme are very similar o hose of he basic model. The ypical size of he ineres rae shock is 16 ECB Working Paper No 91 December 2001
somewha smaller, while he exchange rae appreciaion is much sronger. Because of his appreciaion he effec on prices is more immediae. Graph 4 The effecs of a moneary policy shock in he euro area (Esimaion period: 1980-1998; Sims-Zha idenificaion) 0.15 Oupu 0.5 Shor rae 0.10 0.4 0.05 0.3-0.2-0.05 0.1-0.10-0.0-0.15-0.20-0.1-0.25-0.2-0.30-0.3 0.05 Prices 3.0 Exchange rae - 2.5-0.05 2.0-0.10 1.5-0.15 1.0-0.20-0.25 0.5-0.30 0.0-0.35-0.5 Noe: 90 % confidence bands. 3.2.2. A mixure of shor and long-run resricions Anoher possible idenificaion sraegy is o combine shor and long-run resricions as in Gali (1992) and Gerlach and Smes (1995). In his case, we assume ha he vecor of he endogenous variables is given by: ' [7] Y y p s x and he vecor of he srucural disurbances: Y s d p x [8] s d p wih denoing a supply shock, a demand shock, a moneary policy shock, x and an exchange rae shock. A ypical resricion consisen wih many macro- ECB Working Paper No 91 December 2001 17
economic models is ha only supply shocks have permanen effecs on oupu, while demand, moneary policy and exchange rae shocks have zero impac on oupu in he long run (Blanchard and Quah, 1989). In order o discriminae beween he aggregae demand shocks and he wo oher shocks, we use, as before, he resricions ha he laer wo have no conemporaneous impac on oupu. Finally, in order o disinguish beween he moneary policy shock and he exchange rae shock we assume, as in he basic model, ha he ineres rae is no conemporaneously affeced by disurbances in he exchange rae. Graph 5 Esimaed impulse response funcions for he euro area (Esimaion period: 1980-1998; shor and long-run resricions) Oupu Prices Shor rae Exchange rae 1.25 0.1 6.4-0.25-0.0 5.6 Supply Shock 1.00 0.75 0.50 0.25-0.50-0.75-1.00-1.25-1.50-0.1-0.2-0.3-0.4-0.5 4.8 4.0 3.2 2.4 1.6-1.75-0.6 0.8-2.00-0.7 0.0-0.25-2.25-0.8-0.8 Demand Shock 0.64 0.56 0.48 0.40 0.32 0.24 0.16 0.08 0.96 0.80 0.64 0.48 0.32 0.16 0.7 0.6 0.5 0.4 0.3 0.2 0.1 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0 0.0-1.5-0.08-0.16-0.1-2.0 Moneary policy shock 0.12 0.06-0.06-0.12-0.18-0.24 0.16-0.16-0.32-0.48-0.64 0.75 0.50 0.25 4.2 3.6 3.0 2.4 1.8 1.2 0.6-0.30-0.80 0.0-0.36-0.96-0.25-0.6 0.20 0.4 0.15 3.5 Exchange Rae Shock 0.15 0.10 0.05 - -0.05-0.10-0.15-0.20 0.3 0.2 0.1-0.0-0.1-0.2-0.3 0.10 0.05 - -0.05-0.10-0.15-0.20-0.25 3.0 2.5 2.0 1.5 1.0-0.25-0.4-0.30 0.5 Noe: 90 % confidence bands. The resuls are repored in Graph 5. In he firs row, we find he responses of oupu, prices, he ineres rae and he exchange rae o a supply shock. As he exbook model predics, a supply shock has a posiive influence on oupu and a negaive effec on prices. 18 ECB Working Paper No 91 December 2001
Boh variables reach a peak abou hree years afer he shock and sabilize a ha level subsequenly. In line wih lower inflaion, he nominal ineres rae also decreases following he supply shock. The response o a posiive aggregae demand shock is given in he second row. Is effec on oupu dampens ou afer 4 o 5 years. This shock also leads o a rise in inflaion and he nominal ineres rae. The impac of a moneary policy shock (hird row of Graph 5) is qualiaively comparable wih he previous resuls. The impac on oupu is, however, somewha more prolonged wih a peak effec beween five and eigh quarers. The effec on prices is quaniaively much sronger and more immediae. This appears o be mosly due o he sronger and more persisen appreciaion of he exchange rae. These resuls are broadly consisen wih he findings of previous sudies using his idenificaion sraegy as in Gali (1992) and Gerlach and Smes (1995). 3.2.3. Comparing he moneary policy shocks across models Table 2 repors he correlaions of he moneary policy shocks of he alernaive idenificaion sraegies. Overall, he correlaion of hese shocks is quie high. The correlaion is he weakes beween he shocks derived from conemporaneous resricions and hose derived from he mixed shor-long run resricions. Table 2 Correlaions of policy shocks obained under alernaive idenificaion sraegies 1 2 3 4 1. Benchmark model 1 1.00 0.95 0.91 0.71 2. Benchmark model 2 ( + money) 1.00 0.85 0.67 3. Sims-Zha 1.00 0.73 4. Shor and long-run resricions 1.00 ECB Working Paper No 91 December 2001 19
4. The effec of moneary policy on oher macro variables 4.1. The exended model In his secion, we discuss he influence of a moneary policy shock on oher macroeconomic variables ha are no included in he basic model. We do his by exending he basic model as follows: [9] Y A( L) Z C( L) 0 Y Y -1 B(L) X D( L) Y Z Z-1 E(L) c As before, X and Y are respecively he vecor of exogenous and endogenous variables. Z is he macro-economic variable of ineres (for example invesmen). To keep he policy shock invarian o he inclusion of he differen s, we assume ha he macroeconomic variable of ineres does no affec he block of endogenous variables, Y. Z 12 4.2. Componens of GDP Graph 6 shows he effecs of an area-wide moneary policy shock on he various componens of GDP (oal real GDP, oal invesmen, privae consumpion and ne rade). The impulse response paern of oal invesmen is similar o he response of real GDP. However, he magniude of he effec on invesmen is hree imes as large as he magniude of he effec on GDP. Afer a ypical moneary ighening of 30 basis poins, invesmen falls by around 50 basis poins. In conras, he response of privae consumpion is weaker and slower. Consumpion sars decreasing afer wo quarers and reaches is minimum impac afer five quarers. Finally, following an iniial negaive impac, he ne rade posiion improves significanly in line wih he fall in domesic demand and associaed impors. The influence on oal manufacuring and invesmen and consumpion goods in manufacuring is shown in Graph 7. As expeced, he response of oal manufacuring is larger han he response of real GDP (a peak of abou 50 basis poins afer a moneary ighening of 30 basis poins). Again, we find a significanly sronger impac on invesmen goods han on consumpion goods. 12 We have also esimaed alernaive VARs where he addiional macroeconomic variable is included in he endogenous block of he model. In ha case, his variable is ordered as he las one in he recursive srucure ( ). The resuls are very similar. F( L) 0 20 ECB Working Paper No 91 December 2001
Graph 6 The effecs of a moneary policy shock on componens of GDP (Esimaion period: 1980:1-1998:4) 0.2 Oupu 0.2 Consumpion -0.0-0.0-0.2-0.2-0.4-0.4-0.6-0.6-0.8-0.8 0.2 Invesmen 0.2 Ne rade -0.0-0.0-0.2-0.2-0.4-0.4-0.6-0.6-0.8-0.8 Noe: 90 % confidence bands. ECB Working Paper No 91 December 2001 21
Graph 7 The effecs of a moneary policy shock on manufacuring (Esimaion period: 1980-1998) 0.32 Oupu 0.32 Invesmen goods 0.16 0.16-0.16-0.16-0.32-0.32-0.48-0.48-0.64-0.64-0.80-0.80-0.96-0.96 0.32 Manufacuring 0.32 Consumpion good 0.16 0.16-0.16-0.16-0.32-0.32-0.48-0.48-0.64-0.64-0.80-0.80-0.96-0.96 4.3. Moneary variables and asse prices The impulse response funcions of M3, is componens and loans o he privae secor o a conracionary moneary policy shock are presened in Graph 8. We find a negaive, bu no very significan, liquidiy effec on M1, which appears o be robus o alernaive idenificaion schemes. The slow response of M3 is clearly due o he iniial increase in he oher componens of M3. An ineres rae ighening gives rise o subsiuion effecs from money componens ha bear no or regulaed ineres o ime deposis and money marke funds ha are included in he broader money aggregaes. This finding is consisen wih he lieraure on euro area money demand. 13 There is an immediae and negaive effec on credi o he privae secor. 13 For example, Fase and Winder (1992) find a negaive relaionship beween M1 and he shor-erm ineres rae, while he relaion beween M3 and he shor-erm ineres rae is posiive. 22 ECB Working Paper No 91 December 2001
Graph 8 The effecs of a policy shock on moneary variables (Esimaion period: 1980-1998) 0.4 M3 0.4 M3-M1 0.3 0.3 0.2 0.2 0.1 0.1-0.0-0.0-0.1-0.1-0.2-0.2-0.3-0.3-0.4 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15-0.4 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 0.4 M1 0.4 Privae loans 0.3 0.3 0.2 0.2 0.1 0.1-0.0-0.0-0.1-0.1-0.2-0.2-0.3-0.3-0.4 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15-0.4 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Graph 9 plos he response of various asse prices o a emporary moneary policy ighening. The increase of he shor rae by 30 basis poins is accompanied by a similar, bu smaller increase in he long-erm rae by abou 10 basis poins, as one would expec on he basis of he expecaions hypohesis of he erm srucure of ineres raes. As expeced, sock markes fall immediaely and quie srongly afer a moneary policy ighening. In conras, house prices fall much more gradually. ECB Working Paper No 91 December 2001 23
Graph 9 The effecs of a policy shock on asse prices (Esimaion period: 1980-1998) 0.36 Shor rae 2.4 Sock prices 0.24 1.2 0.12 0.0-1.2-0.12-2.4-0.24-3.6 0.20 Long rae 0.025 House prices 0.15-0 0.10 0.05-0.025-0.050-0.05-0.075-0.10-0.15-0.100 4.4. Labour marke variables Finally, Graph 10 repors he impulse responses o a moneary policy shock of seleced labour marke variables: employmen, labour produciviy, uni labour cos and nominal wages. The paern of employmen is very similar o ha of oupu. However, he quaniaive effec on employmen is less, resuling in a pro-cyclical movemen of labour produciviy. This pro-cyclical behaviour of labour produciviy, ogeher wih he sligh price puzzle ha one can observe in he response of nominal wages, implies ha uni labour coss rise quie significanly before falling back below base line. 24 ECB Working Paper No 91 December 2001
Graph 10 The effecs of a policy shock on oher variables (Esimaion period: 1980-1998) 0.025 Employmen 0.24 Uni labour cos -0 0.16-0.025 0.08-0.050-0.075-0.08-0.100-0.16-0.125-0.24-0.150-0.32 0.10 Produciviy 0.15 Nominal wages 0.10 0.05 0.05 - -0.05-0.10-0.05-0.15-0.10-0.20-0.25-0.15-0.30 4.5. Individual counry effecs The resuls discussed in he preceding secions of his paper are based on synheic, euro area wide ime series variables. Before concluding he analysis, i may be useful o check how oupu and prices in he individual counries of he euro area are affeced by he common moneary policy shock defined in Secion 2. For ha purposes we include oupu and prices of each counry in he exended model of Secion 4.1. and calculae heir response o he idenified euro area moneary policy shock. The resuls are summarised in Graph 11. The upper row plos he individual counry effecs, while he lower row compares he aggregae effecs based on he area-wide benchmark model wih he aggregaion of he individual counry effecs using similar weighs. From he upper par of Graph 11 i is clear ha here is a quie large variabiliy in how oupu and prices in he individual counries respond o he euro area policy shock. Neverheless, wih a few excepions, he overall paern of he responses are similar: ECB Working Paper No 91 December 2001 25
oupu falls quie quickly, while prices ake more ime o respond. When aggregaing hose responses across counries, one basically rerieves he area wide responses discussed in Secion 2. Graph 11 The effecs of he area-wide policy shock on individual counries (Esimaion period: 1980-1998) Counry effecs 0.32 Oupu 0.1 Prices 0.24-0.0 0.16 0.08-0.1-0.08-0.2-0.16-0.3-0.24-0.32 1970 1971 1972 1973-0.4 1970 1971 1972 1973 Aggregae euro area effecs 0.06 Oupu 0.04 Prices 0.02-0.02-0.06-0.04-0.06-0.12-0.08-0.18-0.10-0.12-0.24-0.14 26 ECB Working Paper No 91 December 2001
5. Concluding remarks In his paper, we have esimaed an idenified VAR on synheic euro area daa from 1980 ill 1998 o sudy he macro-economic effecs of a moneary policy shock in he euro area. Using several sandard idenificaion schemes, we uncover plausible impulse responses of he main macro-economic variables o an unexpeced moneary policy ighening in he euro area. A emporary rise in he nominal and real shor-erm ineres rae ends o be followed by a real appreciaion of he exchange rae and a emporary fall in oupu. Prices are more sluggish and only sar o fall significanly below zero several quarers afer GDP. These resuls are very similar o hose obained for he US economy using similar mehodologies. These resuls appear o be sable over differen sample periods. We also invesigaed he reacion of oher macro variables and he GDP componens o a moneary policy shock. The response of oupu is mainly due o a decrease in invesmen which responds wih a magniude hree imes as large as GDP, and o a lesser exen in privae consumpion. Employmen falls in line wih GDP, bu less srongly which resuls in a pro-cyclical response of labour produciviy. We find an immediae liquidiy effec on M1, bu a more gradual decrease of M3 and oher credi aggregaes. The long-erm ineres rae shows a mued response o he emporary rise in he shor-erm ineres rae consisen wih he expecaions heory of he erm srucure. Share prices fall significanly on impac, while house prices respond more sluggishly. Overall, hese findings are encouraging and show in our view ha he resuls from applying sandard echniques o synheic euro area daa can be used as a benchmark for he furher heoreical and empirical analysis of he ransmission mechanism in he euro area. Of course, he caveas ha come wih his analysis are even more imporan in his case. In paricular, we know ha here was no common moneary policy in he euro area over he esimaion period, so ha idenifying moneary policy innovaions on he basis of an aggregae moneary policy reacion funcion may be problemaic. I is herefore imporan o monior how hese resuls change as daa from he new single moneary policy regime come in. In addiion, he aggregae analysis resuls need o be complemened wih a more disaggregaed invesigaion ha akes he feaures of he naional moneary policy regimes ino accoun. Recen work in ha respec can be found in Sala (2001), Rebucci and Ciccarelli (2001) and Mojon and Peersman (2001). ECB Working Paper No 91 December 2001 27
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European Cenral Bank Working Paper Series 1 A global hazard index for he world foreign exchange markes by V. Brousseau and F. Scacciavillani, May 1999. 2 Wha does he single moneary policy do? A SVAR benchmark for he European Cenral Bank by C. Monicelli and O. Trisani, May 1999. 3 Fiscal policy effeciveness and neuraliy resuls in a non-ricardian world by C. Deken, May 1999. 4 From he ERM o he euro: new evidence on economic and policy convergence among EU counries by I. Angeloni and L. Dedola, May 1999. 5 Core inflaion: a review of some concepual issues by M. Wynne, May 1999. 6 The demand for M3 in he euro area by G. Coenen and J.-L. Vega, Sepember 1999. 7 A cross-counry comparison of marke srucures in European banking by O. de Band and E. P. Davis, Sepember 1999. 8 Inflaion zone argeing by A. Orphanides and V. Wieland, Ocober 1999. 9 Asympoic confidence bands for he esimaed auocovariance and auocorrelaion funcions of vecor auoregressive models by G. Coenen, January 2000. 10 On he effeciveness of serilized foreign exchange inervenion by R. Faum, February 2000. 11 Is he yield curve a useful informaion variable for he Eurosysem? by J. M. Berk and P. van Bergeijk, February 2000. 12 Indicaor variables for opimal policy by L. E. O. Svensson and M. Woodford, February 2000. 13 Moneary policy wih uncerain parameers by U. Södersröm, February 2000. 14 Assessing nominal income rules for moneary policy wih model and daa uncerainy by G. D. Rudebusch, February 2000. 15 The ques for prosperiy wihou inflaion by A. Orphanides, March 2000. 16 Esimaing he implied disribuion of he fuure shor erm ineres rae using he Longsaff- Schwarz model by P. Hördahl, March 2000. 17 Alernaive measures of he NAIRU in he euro area: esimaes and assessmen by S. Fabiani and R. Mesre, March 2000. 18 House prices and he macroeconomy in Europe: Resuls from a srucural VAR analysis by M. Iacoviello, April 2000. 30 ECB Working Paper No 91 December 2001
19 The euro and inernaional capial markes by C. Deken and P. Harmann, April 2000. 20 Convergence of fiscal policies in he euro area by O. De Band and F. P. Mongelli, May 2000. 21 Firm size and moneary policy ransmission: evidence from German business survey daa by M. Ehrmann, May 2000. 22 Regulaing access o inernaional large value paymen sysems by C. Holhausen and T. Rønde, June 2000. 23 Escaping Nash inflaion by In-Koo Cho and T. J. Sargen, June 2000. 24 Wha for price sabiliy by F. Smes, July 2000. 25 Cauion and conservaism in he making of moneary policy by P. Schellekens, July 2000. 26 Which kind of ransparency? On he need for clariy in moneary policy-making by B. Winkler, Augus 2000. 27 This is wha he US leading indicaors lead by M. Camacho and G. Perez-Quiros, Augus 2000. 28 Learning, uncerainy and cenral bank acivism in an economy wih sraegic ineracions by M. Ellison and N. Valla, Augus 2000. 29 The sources of unemploymen flucuaions: an empirical applicaion o he Ialian case by S. Fabiani, A. Locarno, G. Oneo and P. Sesio, Sepember 2000. 30 A small esimaed euro area model wih raional expecaions and nominal rigidiies by G. Coenen and V. Wieland, Sepember 2000. 31 The disappearing ax base: Is foreign direc invesmen eroding corporae income axes? by R. Gropp and K. Kosial, Sepember 2000. 32 Can indeerminacy explain he shor-run non-neuraliy of money? by F. De Fiore, Sepember 2000. 33 The informaion conen of M3 for fuure inflaion by C. Trecroci and J. L. Vega, Ocober 2000. 34 Capial marke developmen, corporae governance and he credibiliy of exchange rae pegs by O. Casrén and T. Takalo, Ocober 2000. 35 Sysemic risk: A survey by O. De Band and P. Harmann, November 2000. 36 Measuring core inflaion in he euro area by C. Morana, November 2000. 37 Business fixed invesmen: Evidence of a financial acceleraor in Europe by P. Vermeulen, November 2000. ECB Working Paper No 91 December 2001 31
38 The opimal inflaion ax when axes are cosly o collec by F. De Fiore, November 2000. 39 A money demand sysem for euro area M3 by C. Brand and N. Cassola, November 2000. 40 Financial srucure and he ineres rae channel of ECB moneary policy by B. Mojon, November 2000. 41 Why adop ransparency? The publicaion of cenral bank forecass by P. M. Geraas, January 2001. 42 An area-wide model (AWM) for he euro area by G. Fagan, J. Henry and R. Mesre, January 2001. 43 Sources of economic renewal: from he radiional firm o he knowledge firm by D. R. Palenzuela, February 2001. 44 The supply and demand for eurosysem deposis The firs 18 monhs by U. Bindseil and F. Seiz, February 2001. 45 Tesing he Rank of he Hankel marix: a saisical approach by G. Camba-Mendez and G. Kapeanios, February 2001. 46 A wo-facor model of he German erm srucure of ineres raes by N. Cassola and J. B. Luís, February 2001. 47 Deposi insurance and moral hazard: does he counerfacual maer? by R. Gropp and J. Vesala, February 2001. 48 Financial marke inegraion in Europe: on he effecs of EMU on sock markes by M. Frazscher, March 2001. 49 Business cycle and moneary policy analysis in a srucural sicky-price model of he euro area by M. Casares, March 2001. 50 Employmen and produciviy growh in service and manufacuring secors in France, Germany and he US by T. von Wacher, March 2001. 51 The funcional form of he demand for euro area M1 by L. Sracca, March 2001. 52 Are he effecs of moneary policy in he euro area greaer in recessions han in booms? by G. Peersman and F. Smes, March 2001. 53 An evaluaion of some measures of core inflaion for he euro area by J.-L. Vega and M. A. Wynne, April 2001. 54 Assessmen crieria for oupu gap esimaes by G. Camba-Méndez and D. R. Palenzuela, April 2001. 55 Modelling he demand for loans o he privae secor in he euro area by A. Calza, G. Garner and J. Sousa, April 2001. 32 ECB Working Paper No 91 December 2001
56 Sabilizaion policy in a wo counry model and he role of financial fricions by E. Faia, April 2001. 57 Model-based indicaors of labour marke rigidiy by S. Fabiani and D. Rodriguez-Palenzuela, April 2001. 58 Business cycle asymmeries in sock reurns: evidence from higher order momens and condiional densiies by G. Perez-Quiros and A. Timmermann, April 2001. 59 Uncerain poenial oupu: implicaions for moneary policy by M. Ehrmann and F. Smes, April 2001. 60 A muli-counry rend indicaor for euro area inflaion: compuaion and properies by E. Angelini, J. Henry and R. Mesre, April 2001. 61 Diffusion index-based inflaion forecass for he euro area by E. Angelini, J. Henry and R. Mesre, April 2001. 62 Specral based mehods o idenify common rends and common cycles by G. C. Mendez and G. Kapeanios, April 2001. 63 Does money lead inflaion in he euro area? by S. N. Alimari, May 2001. 64 Exchange rae volailiy and euro area impors by R. Anderon and F. Skudelny, May 2001. 65 A sysem approach for measuring he euro area NAIRU by S. Fabiani and R. Mesre, May 2001. 66 Can shor-erm foreign exchange volailiy be prediced by he Global Hazard Index? by V. Brousseau and F. Scacciavillani, June 2001. 67 The daily marke for funds in Europe: Has somehing changed wih he EMU? by G. P. Quiros and H. R. Mendizabal, June 2001. 68 The performance of forecas-based moneary policy rules under model uncerainy by A. Levin, V. Wieland and J. C.Williams, July 2001. 69 The ECB moneary policy sraegy and he money marke by V. Gaspar, G. Perez-Quiros and J. Sicilia, July 2001. 70 Cenral Bank forecass of liquidiy facors: Qualiy, publicaion and he conrol of he overnigh rae by U. Bindseil, July 2001. 71 Asse marke linkages in crisis periods by P. Harmann, S. Sraemans and C. G. de Vries, July 2001. 72 Bank concenraion and reail ineres raes by S. Corvoisier and R. Gropp, July 2001. 73 Inerbank lending and moneary policy ransmission evidence for Germany by M. Ehrmann and A. Worms, July 2001. ECB Working Paper No 91 December 2001 33
74 Inerbank marke inegraion under asymmeric informaion by X. Freixas and C. Holhausen, Augus 2001. 75 Value a risk models in finance by S. Manganelli and R. F. Engle, Augus 2001. 76 Raing agency acions and he pricing of deb and equiy of European banks: Wha can we infer abou privae secor monioring of bank soundness? by R. Gropp and A. J. Richards, Augus 2001. 77 Cyclically adjused budge balances: An alernaive approach by C. Bouhevillain, P. Cour- Thimann, G. van den Dool, P. Hernández de Cos, G. Langenus, M. Mohr, S. Momigliano and M. Tujula, Sepember 2001. 78 Invesmen and moneary policy in he euro area by B. Mojon, F. Smes and P. Vermeulen, Sepember 2001. 79 Does liquidiy maer? Properies of a synheic divisia moneary aggregae in he euro area by L. Sracca, Ocober 2001. 80 The microsrucure of he euro money marke by P. Harmann, M. Manna and A. Manzanares, Ocober 2001. 81 Wha can changes in srucural facors ell us abou unemploymen in Europe? by J. Morgan and A. Mourougane, Ocober 2001. 82 Economic forecasing: some lessons from recen research by D. Hendry and M. Clemens, Ocober 2001. 83 Chi-squared ess of inerval and densiy forecass, and he Bank of England's fan chars by K. F. Wallis, November 2001. 84 Daa uncerainy and he role of money as an informaion variable for moneary policy by G. Coenen, A. Levin and V. Wieland, November 2001. 85 Deerminans of he euro real effecive exchange rae: a BEER/PEER approach by F. Maeso- Fernandez, C. Osba and B. Schnaz, November 2001. 86 Raional expecaions and near raional alernaives: how bes o form expecaions by M. Beeby, S. G. Hall and S. B. Henry, November 2001. 87 Credi raioning, oupu gap and business cycles by F. Boissay, November 2001. 88 Why is i so difficul o bea he random walk forecas of exchange raes? by L. Kilian and M. P. Taylor, November 2001. 89 Moneary policy and fears of insabiliy by V. Brousseau and Carsen Deken, November 2001. 90 Public pensions and growh by S. Lambrech, P. Michel and J. -P. Vidal, November 2001. 34 ECB Working Paper No 91 December 2001