What Does the Single Monetary Policy Do? a Svar Benchmark for the European Central Bank by Carlo Monticelli and Oreste Tristani

* We wish to thank the anonymous referee of the Working Paper Series for useful comments and suggestions, while retaining responsibility for all remaining errors; the paper has also benefited from comments by participants in the XIII annual meeting of the European Economic Association, Berlin, September 1998. A substantial part of this work was carried out while the second author was working at the Banca d'Italia, Servizio Studi. Views expressed represent exclusively the opinion of the authors and do not necessarily correspond to those of the European Central Bank or the Banca d'Italia. Telex 411 144 ecb d All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. The views expressed in this paper are those of the authors and do not necessarily reflect those of the European Central Bank. Abstract This paper puts forward a characterization of the structural features of the economic system relevant to the monetary-policy decisions of the European Central Bank. The econometric analysis adopts a parsimonious VAR representation of three key macroeconomic variables (interest rates, prices and GDP) aggregated across countries to obtain area-wide time series. The exogenous disturbances driving the multivariate system are identified imposing restrictions based on economic theory. The dynamic properties of the estimated models are analyzed and compared with the available evidence for the US. The robustness of this characterization is corroborated by the estimates from a different sample period and by the findings from an alternative model that singles out German monetary policy in view of its anchor role within the ERM.