Reliable measures of the size and direction of changes in monetary policy are very crucial for examining the effects of monetary policy on the economy. Monetary Condition Index (MCI) can be used as a tool to assess the stance of monetary policy. This index is defined as the weighted average of different monetary transmission mechanism relative to their values in a base period. The weights in MC...

The European Community operated from 1979 to 1999, before the Euro was introduced, under a pegged exchange rate regime, the European Monetary System (EMS). This was also the time period when the European unemployment rate was secularly rising. Germany was the dominant country in Europe and other countries had, to a great extent, to follow Germany’s monetary policy. Kenen (2002) calls this the l...

In recent years, analysts and policy makers alike have been evaluating the nexus between exchange rates and macroeconomic stability. Among the most important questions asked is why have some countries adopted rigid, including fixed, exchange-rate regimes, while others have opted for more flexible systems? This paper addresses this question from a political economy perspective, both theoreticall...

A fixed exchange rate limits the ability of the real exchange rate to adjust to shocks, and tends to raise the volatility of real GDP. But adjustment may be enhanced if internal prices are more flexible under a fixed exchange rate. This paper develops a model in which price setters incur a cost to retain the option of ex-post price flexibility. The benefit of flexibility is increasing in the va...

This paper studies a monetary model that is standard in all respects except that market participants have incomplete knowledge about the economic structure and employ adaptive learning rules to learn about the economic environment. Market participants also must contend with unannounced regime shifts. Simulation results suggest that the models under adaptive learning, especially constant-gain le...

The Bernanke-Blinder credit-view model is expanded to encompass a small, open economy with fixed exchange rates. In contrast to conventional wisdom and traditional models, monetary policy is resurrected as a stabilization tool. Further, various financial sector shocks are shown to have real aggregate demand effects. We show that independent monetary policy actions can ha ve substantive impacts ...

Since the 1990s there have been a number of major changes in the design and conduct of monetary policy. In a globalized environment, there is less time to adjust to shocks and greater need to achieve closer convergence of economic performance among trading partners. As a result, a number of developing countries have adopted exchange rate regimes with more flexibility, and thereby greater scope ...