Strategy of Monetary Policy: Observations from Germany and Italy
This paper uses a cointegration analysis and a Vector Error Correction (VEC) model to investigate the relationship between interest rates and a set of macroeconomic variables in Italy and Germany, over the period 1989-1999. It has been found that both countries have placed importance on price stability. The discount rate has had a significant impact on prices and output for both countries. Exchange rate was important only for Italy in the discount rate VEC specification. The results further indicate that Italian monetary policy is almost the same as the German one.