Project B5:
Macroeconomic Institutions and Structures

Director: Prof. Dr. Manfred J.M. Neumann

Research Unit B5 investigates the implications of alternative concepts of monetary policy, the measurement of central bank independence, and the transmission of shocks within alternative exchange rate regimes.

Monetary policy operates via interest rates, exchange rates and credit allocation effects. At the moment, financial structures, credit relations and central bank operating procedures differ between European countries. This may lead to a divergent impact of a common monetary policy on output in the member countries of the prospective European Monetary Union. Differences in the monetary transmission mechanism in the European Union will be investigated and their relevance for changes in output will be assessed (Wesche).

It is widely accepted that central bank independence is a prerequisite for monetary stability. The degree of central bank independence is usually measured by the legal status of the central bank. Yet, the performance of the central bank regarding output and price level stability depends on its actual degree of independence. A means of revealing factual central bank independence is to measure output and inflation variances, implying the development of a non-normative theory of central bank independence (Neumann).

The transmission of shocks and monetary interdependencies in alternative exchange rate regimes are an important topic in the present European Monetary System and play an important role in the design of the EMS II. In this context, it is instructive to identify the predominant real and monetary shocks and their transmission mechanisms using structural empirical models (Weidmann). Another issue are the determinants of speculative attacks and the central banks' reaction to exchange rate fluctuations. Testing the effectiveness of central bank intervention will allow for a bi-directional causality between interventions and exchange rates. The impact of supply and demand shocks on the exchange rate will be investigated using structural vector autoregression (Weber).

After European Monetary Union will have been established, regional real shocks can no longer be absorbed by exchange rate movements, so that factor markets - and in particular the labor market - will have to bear the burden of adjustment. On the other hand, exchange rate volatility as a source of uncertainty ceases to exist. In order to assess the magnitude and importance of these effects, the role of trade for employment as a whole as well as its components (skilled and unskilled labor) will be investigated in various manufacturing industries (Kohns).


University of Bonn
Institut für Internationale Wirtschaftspolitik
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D - 53113 Bonn / Germany

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