|
| |
N° 1997 - 10 |
  |
| May |
| Looking for French Monetary Policy |
| Benoît Mojon |
|
The aim of this paper is to identify French
monetary policy shocks over the last decade. France undertook reforms of financial
markets in the middle of the eighties. The two major changes of financial markets
with respect to monetary policy were the end of its implementation through " encadrement
du crédit " and the move toward complete free circulation of capital. Two major
macroeconomic achievements could be observed since these changes took place. First,
the French franc has not been devalued against the D-Mark since the 12th of January
1987. Second, inflation has remained stable and low since the mid-eighties. Hence
the interest in a better understanding of French monetary policy during this particular
period.
The identification of monetary policy shocks is the preliminary stage toward this end. As a matter of fact, it is essential to disentangle exogenous monetary policy shocks from the endogenous developments of macroeconomic variables. For instance, 1% increase in the interest rate targeted by the central bank does not mean the same in a context of high or low inflation. This is why economists consider that only exogenous shocks of the interest rate targeted by the central bank can be interpreted as a monetary policy shocks.
Vector Auto-Regressive models (VARs) seem to be the adequate econometric tool to identify such exogenous policy shocks. This paper uses them to focus on two aspects of French financial markets reforms which are essential to monetary policy.
First, do the new procedures of the implementation of monetary policy make the stance of Banque de France (BdF) monetary policy more readable? France abandoned its " encadrement du crédit " by which the central bank provided liquidity at low cost to commercial banks, as long as they respected the pre-determined volume of credit they could distribute. It turned to a more market-oriented management of banks liquidity. Since then, the BdF has relied on two interest rates, the tender rate and the repurchase agreement rate, to form a corridor in which the market rate for liquidity settles. Can these procedures, which have been working since 1987, be analysed to measure French monetary policy? Second, does the free circulation of capital leave the BdF any room for manoeuvre? The free circulation of capital should enhance financial integration. The latter, combined with the peg of the exchange rate to the D-Mark, reduces the scope for autonomous changes in French interest rates. How do these constraints on French interest rates influence monetary policy?
The results are threefold. First, one of the procedural approaches seems relevant to identify French monetary policy shocks over this period of estimation. Second, the differences in the monetary shocks constructed with the two identification schemes add to the growing concerns (Cochrane 1995, Rudebush 1996) about the use of VARs to simulate monetary policy shocks. Third, the impact of monetary policy shocks on the French economy is highly dependant on including some international financial variables in the model.
|
Abstract |
| |
|
| |
Keywords |
| |
JEL classification |
| To visualise the full text document, use Acrobat
Reader |
Full text (pdf) |
|
|
| |
|
|
|
|
|
