Germany and the euro area: differences in the transmission process of monetary policy

This study analyses the transmission of monetary policy in Germany for the EMS period in the framework of a structural vector error correction model (S-VECM) analysis. Three stable cointegration relationships are found: a money demand relation, an interest rate spread and a stationary real interest rate. Based on both contemporaneous and long run restrictions, five structural shocks to the economy are identified. In contrast to the euro area, output and inflation are not independent in the long run for Germany. In accordance with results for Europe, we do not find strong support for monetary targeting for Germany. Money seems not to be controllable and the leading indicator role of money for inflation is not detected.