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CESifo Economic Studies 2005 51(4):757-775; doi:10.1093/cesifo/51.4.757
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Right arrow E52 - Monetary Policy (Targets, Instruments, and Effects)
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© Ifo Institute for Economic Research, Munich, 2005

The Phillips Curve, the IS Curve and Monetary Transmission: Evidence for the US and the Euro Area

Charles Goodhart and Boris Hofmann*

* Boris Hofmann, Deutsche Bundesbank Wilhelm-Epstein-Straße 14, 60431 Frankfurt am Main, Germany e-mail: boris.hofmann{at}bundesbank.de. Charles Goodhart, Financial Markets Group, London School of Economics Houghton Street, London WC2A 2AE, UK e-mail: caegoodhart{at}aol.com

In this paper we assess the empirical performance of commonly used empirical specifications of the baseline New Keynesian model for the US and the euro area. We estimate standard specifications of the model and extended specifications also including non-standard determinants of aggregate supply and demand. The results suggest that based on the standard specifications it is often not possible to establish a significant link between the monetary policy instrument and output and inflation. Based on the extended specifications of the model, which take into account the significant effect of commodity prices on inflation and of house prices on the output gap, we are generally able to restore a significant monetary transmission channel. (JEL E3, E52, C22)


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