Monetary Transmission in Germany: Evidence From a Structural Econometric Model

In this paper a cointegrated system represented as a simultaneous Vector Equilibrium Correction Model for money, prices, output and interest rates in Germany is estimated. The model gives insight in the process of transmission mechanisms of the Bundesbank's monetary policy. The empirical results are consistent with markets' perceptions of a credible monetary policy by which the Bundesbank sticks to its announced monetary targets. A policy reactionfunction for short term interest rates is found which is very similar to a Taylortype feedback rule.