G 97 / 1 A measure of monetary conditions Richard Dennis January 1997 JEL Classification

This paper explains why the overall stance of monetary policy is effected by both interest rates and the exchange rate, and hence why a Monetary Conditions Indicator can provide useful information about the stance of policy. Three output gap equations estimated in this paper reveal that the real interest rate and the real exchange rate both affect excess demand but that the real interest rate is the more powerful and faster acting policy transmission channel. Richard Dennis Economics Department Reserve Bank of New Zealand P O Box 2498 Wellington NEW ZEALAND Phone: +64 4 471-3828 Fax: +64 4 473-1209 Email: [email protected] The views expressed in this paper are those of the author and do not necessarily reflect those of the Reserve Bank of New Zealand. 1 Thanks go to Darren Gibbs, Francisco Nadal-De Simone, Steve Poloz, and Weshah Razzak for their comments. Any remaining errors are the responsibility of the author.