Measuring monetary independence: Evidence from a group of new EU
member countries
Jesus Crespo Cuaresma
University of Vienna
Abstract:
Empirical evidence on the validity of the monetary independence
hypothesis for a group of new EU member countries is presented. We
develop a new methodology for measuring the degree of monetary
independence and use it in empirical testing. Specifically, we employ
Dynamic Conditional Correlation Multivariate GARCH (DCC-MGARCH) models
to estimate the degree of time-varying correlation in interest rate
shocks with Germany and the U.S. under different exchange rates regimes
for the countries under consideration. Cross-country comparisons provide
evidence that countries with more flexible exchange rate regimes tend to
display higher degrees of monetary independence. When looking at the
correlation dynamics of an individual country over time, the results are
mixed. Although the dynamic behavior of the correlations in interest
rate shocks in the Czech Republic appear to be consistent with theory,
we find no evidence to support the validity of the monetary hypothesis
in Hungary and Poland.