Abstract
This Selected Issues paper reviews developments in health care spending in France and discusses the recent measures to improve the functioning of the system and contain costs. It argues that by addressing many of the issues that had bedeviled past reforms, the new measures offer a reasonable hope of containing France’s health expenditures. The paper presents a brief review of the institutional background and of past trends in health care spending and also offers an analysis of the major forces behind the recent and projected growth in expenditure.
III. Monetary Transmission1
A. Introduction and Overview
This paper attempts to characterize the main patterns of the monetary transmission mechanism in France. The objective is to examine how changes in the monetary authorities’ policy instruments affect some key macroeconomic variables (nominal and real), as well as the principal channels through which these effects operate. While the primary focus is on the effects of variables that are closely controlled by the monetary authorities, the impact of autonomous shocks to other, intermediate, transmission variables is also examined. The paper employs variants of the vector autoregression (VAR) methodology, building on the methodology presented in SM/96/118.
While this paper shares a number of features with other recent work on the subject, it also deviates from it in several respects. First, empirical work on the transmission mechanism in the case of France, as for other EU countries, has typically focused on a short-term domestic interest rate as the monetary policy instrument, very much in line with VAR models on the transmission mechanism for the U.S. economy. While such a choice would indeed appear natural for a relatively closed economy whose monetary authorities do not target the exchange rate, it appears less appropriate for a smaller and much more open economy where a central aspect of monetary policy is the stability of the exchange rate vis-à-vis other core ERM countries. This paper therefore examines separately the impact of changes in the short-term interest rate of Germany (by far the largest of the other core ERM countries) and changes in the French-German interest rate differential. Separate examination of the impact of these two variables appears justified on the following grounds: there are good theoretical reasons to postulate that the two components may affect the economy quite differently; such a decomposition would appear to capture better the context in which French monetary policy has been conducted; and it provides a convenient perspective from which to look at some of the possible consequences of EMU. Second, a “structural” VAR is implemented to allow short-term interest rates to be immediately affected by changes in the exchange rate, thus capturing an important aspect of the way French monetary policy has been conducted since the mid-1980s. Finally, the paper attempts to assess the importance of credit in the transmission mechanism.
The estimation results presented in this paper suggest that the decomposition of the French interest rate into a German rate and a premium over the German rate is indeed fruitful. An important conclusion is that the two interest rate components affect certain key variables (both ultimate target variables and intermediate transmission variables) quite differently. This difference is particularly striking with regard to real activity: while the German component of the French short-term interest rate turns out to have had a significant impact on real GDP, the estimation results fail to indicate a similar impact from the short-term interest differential. In addition, simulations suggest that in France credit has an important role in the transmission of monetary policy.
The plan of the paper is as follows: Section B provides a brief summary of the literature and a discussion of the main channels through which monetary policy is usually thought to be transmitted, with a particular emphasis on the “money” and “credit” channels. Section C discusses the impact of interest rates on the economy. Section D examines the relative strength of the “money” and “credit” channels of monetary transmission. Section E concludes.
B. Survey of the Literature on Transmission Channels
Previous empirical work
Empirical investigation of the monetary transmission mechanism typically attempts to describe how changes in certain key variables, whether policy instruments or intermediate transmission variables, affect the nominal and real variables that constitute the ultimate targets of the monetary authorities. Since the application of the VAR methodology to the study of monetary transmission in the United States by Sims (1980, 1981, 1986), and its further refinement by Litterman and Weiss (1984), the methodology has become a standard empirical tool in this area.2 Following the application of unrestricted VAR models to the study of monetary transmission in the United States, the methodology has more recently been applied to a number of European countries.3 Recent VAR-based studies of the monetary transmission mechanism for the case of France include Sims (1992), BIS (1995), and Barran, Coudert and Mojon (1996).
Sims (1992) attempts an international comparison of the monetary transmission mechanism in the G-7 countries. For the case of France, this paper estimates a six-variable VAR consisting, in that order, of the call rate (as the monetary policy instrument), the French franc/SDR exchange rate, a commodity price index, Ml money supply, the consumer price index, and industrial production, seasonally adjusted. Monthly data were used, and the model was estimated over a very large sample, ranging from 1965 to 1990. The paper identifies a discernible impact of the policy variable on both prices and real activity. Thus, a positive shock to the short-term interest rate is estimated to have a depressing impact on industrial production, with the effect materializing almost immediately in the wake of the shock and persisting over a period of 48 months. However, the estimated effect is rather small compared with the results for the other G-7 countries considered in the paper.4 The estimated impact on prices is rather surprising. An increase in the short-term interest rate is estimated to result in a rise of the CPI above its baseline path, with the effect persisting almost throughout the 48 month simulation period. Moreover, this effect is in sharp contrast to the estimated effect for the other G-7 countries: whereas some of them do experience an increase in prices in the wake of the interest rate increase, the effect is nowhere as persistent, and in fact consumer prices start to decline beyond a certain point, eventually falling beyond their baseline path.
Baran, Coudert and Mojon (1996) attempt a similar international comparison, though their focus is on EU countries. The authors estimate a five variable model including a short-term money market rate, the bilateral D-mark exchange rate, the consumer price index, real GDP, and a world export price index. They employ quarterly data and estimate the model over the period 1976–94. The estimation results for France are only in part consistent with Sims (1992). A positive shock to the short-term interest rate is estimated to result in a moderate depressing effect on output; however, the effect becomes statistically insignificant midway though the simulation horizon. On the other hand, an increase in short-term rates is estimated to have a small (but statistically significant) depressing effect on prices, almost throughout the simulation horizon. This latter conclusion is thus in sharp contrast to the results of Sims (1992) described above.
Transmission channels
The channels through which a tightening of monetary policy, via an increase in interest rates, exerts its impact on the economy have generated considerable theoretical and empirical debate. Until recently, the dominant view held that monetary policy operated mainly through its impact on monetary aggregates. More recently, however, an independent role for bank credit has been explored, and greater attention has been devoted to financial market prices as capturing important aspects of monetary transmission.5
The theoretical formulation underpinning the “money” channel of monetary transmission relies on a two-asset model, in which money and bonds are viewed as imperfect substitutes.6 Put rather simply, the transmission according to the money view works as follows: a tightening of monetary policy via an increase in the central bank’s official rates leads to a decrease in commercial bank reserves, and hence reduces the ability of the banking system to generate deposits.7 This also implies that net bond holdings of banks must fall as well. Hence, the household sector must hold less money and more bonds. Under sluggish price adjustment, households will also find themselves holding lower money balances in real terms as well relative to the level they consider desirable, and asset market equilibrium will require an increase in real market interest rates. This, in turn, can have real effects on investment and spending on consumer durables, and ultimately on the aggregate level of economic activity; the more sluggish the price adjustment the larger will be the likely effect on economic activity.
On the other hand, transmission via a “credit” channel formally entails an extension of the menu of assets to three, by including bank loans as an imperfect substitute for bonds both on the liability side of firms’ balance sheets and on the asset side of the balance sheet of banks.8 To gain insight on how the credit channel can operate independently of the money channel in such a setting, it may be useful to imagine for a moment that money and bonds are perfect substitutes. In that case, households would be indifferent to the composition of their asset portfolio, and hence would be perfectly willing to hold the lower amount of money and higher amount of bonds that a monetary tightening entails. Accordingly, there would be no need for market interest rates to adjust, and monetary policy would have no impact via the money channel. However, monetary policy can still have an effect via the credit channel, to the extent that the decrease in reserves brought about by the monetary tightening induces banks to cut back the supply of loans. In that case, the cost of loans relative to bonds will rise, and those firms that rely primarily on bank lending (say, because they do not have access to bond markets) may cut back investment, thus depressing aggregate economic activity.
Finally, a strand of the literature also favors modeling the monetary transmission mechanism as taking place primarily via financial market prices, rather than via quantities.9 From an empirical viewpoint, this approach has been partly motivated by the rather well-documented tendencies of money demand functions to display instability since the early 1980s, in turn reflecting the extensive capital flow liberalization and financial innovation that have been taking place during the last two decades. This may pose problems for the implementation of a VAR model that includes monetary and credit aggregates as important transmission variables. Accordingly, this family of models specifies market interest rates of different maturities, as well as the exchange rate, as capturing the essence of the transmission of a monetary policy shock to prices and economic activity. For economies that display a large degree of openness to international trade, the exchange rate channel is thus often considered to be among the most important components of the monetary transmission mechanism. The relevant effect in this case is quite straightforward. A monetary policy tightening, via an increase in the central bank’s official intervention rates, would tend to lead to a nominal appreciation of the currency. To the extent that price adjustment is sluggish, this will entail a real appreciation, thus reducing aggregate demand.
C. The Impact of Interest Rates on the Economy
Choice of variables and specification of the model
The choice of the variable to serve as a proxy for the monetary policy instruments raises a number of questions. A natural choice would obviously be one of the Banque de France official intervention rates. However, given the changes over time in the monetary authorities’ intermediate targets, as well as the nature and function of the central bank’s lending facilities themselves, it is difficult to identify a single official rate that could accurately be described as the key policy instrument throughout the period under consideration. Accordingly, and in line with other research in this area, a call-money rate was chosen as the closest proxy for the policy instrument.10
Components of the French interest rate
Taking only the French interest rate as the proxy for the monetary policy instrument, while formally correct, does not pay adequate regard to a central feature of French monetary policy: the fact that throughout the period under consideration it has to a large extent been geared to supporting the exchange rate of the franc vis-à-vis core ERM currencies. Viewed in this way, the French short-term rate can be thought of in terms of two distinct components: the German interest rate and the differential vis-à-vis this interest rate. In effect, the approach generally adopted in the literature on the monetary transmission mechanism in European countries implicitly imposes the restriction that the impact of the two components of the French short-term rate is identical. It is argued below that such a restriction may be unwarranted.
In fact, it can be argued that there are theoretical reasons to expect that the impact of the two components of the French short-term rate may be fundamentally different, so that including them separately, and in an unrestricted fashion, in the analysis may prove worthwhile. In the first place, to the extent that the exchange rate stability vis-à-vis the strongest currencies in the system can be regarded as reasonably credible in the long-run, French long-term interest rates could be expected to be largely driven by German long-term rates. Accordingly, it can be conjectured that a change in the French short-term rate that reflects a change in the short-term differential may have less of an effect on French long-term rates than one originating from a change in the short-term interest rate in Germany (at least to the extent that a positive term structure effect is in operation in Germany). In that sense, the impact of a change in the interest rate differential on aggregate demand may be conjectured to be smaller than the impact of an interest rate change originating in Germany.
A second reason why the two components of the French short-term rate might have different effects is that they may lead to different changes in the effective exchange rate. In this case, however, the relative strength of the two interest rate components is somewhat ambiguous. An increase in the differential might be associated with effective appreciation (depreciation) of the franc, depending on whether during periods of general ERM stress the French authorities were more (less) successful than other ERM members in maintaining exchange rate stability. On the other hand, vis-à-vis non-ERM currencies, increases in the differential might be expected to have less of an impact than increases in the German rate.
More generally, even in a situation where an increase in the differential may represent a response by the monetary authorities to unfavorable market perceptions regarding the long-run credibility of the franc/Deutsche mark parity, the impact of the two components of the French short-term interest rate can be expected to be different because they are likely to be perceived as implying different changes in the real rate. Given the French monetary policy strategy during the period under consideration, the French monetary authorities, under the conditions of such a credibility crisis, attempted to raise the differential sufficiently so that market participants were indifferent to holding francs or D-marks, given expectations of a franc devaluation. Under these conditions, to the extent that expectations of a franc devaluation were associated with inflationary expectations,11 it could be argued that the increase in the ex ante real interest rate resulting from a rise in the differential could be smaller than that resulting from a rise in the German rate. Indeed, in the (extreme) case where inflationary expectations are based on purchasing power parity, the increase in the ex ante real interest rate resulting from a rise in the differential would be zero.
Contemporaneous response to exchange rate shocks
In specifying the model, it is also important to take into account the specific context in which French monetary policy has been conducted in recent years. A major goal of monetary policy in France has been to support the stability of the franc vis-à-vis the strongest currencies in the ERM. Therefore, it could be surmised that the policy reaction function of the Banque de France could well involve within-period adjustment of its policy instrument in response to a shock to the exchange rate vis-à-vis these currencies, as well as to a shock to the long-term interest rate to the extent that this reflects perceived policy credibility. To the extent that such contemporaneous feedbacks into the policy instrument are indeed important, their inclusion in the specification employed is relevant to assess the impact of the policy instrument on certain key variables. Hence, in order to side-step the problems associated with the more commonly used recursive structure implied in the standard Cholesky decomposition (as described in SM/96/118), an econometric approach is adopted here that entails a non-recursive contemporaneous structure, while at the same time retaining the advantages of an unrestricted lag structure.12
This paper therefore discusses a VAR model that includes both financial market prices and quantities as intermediate transmission variables, in which the two components of the French interest rate are separated, and that allows contemporaneous shocks in intermediary target variables to affect the response of monetary authorities. Specifically, the model consists of monetary policy instrument variables (the German interest rate and the French-German interest differential), five intermediate transmission variables (the nominal effective exchange rate, the franc/core-ERM-currencies exchange rate, credit to the private sector, the long-term bond yield, and the narrow money aggregate—Ml), and two target variables (consumer prices and a real activity variable).13 Moreover, we allow the interest rate differential to be contemporaneously affected by the exchange rate between the franc and core ERM currencies, as well as by the long-term interest rate. Further deviating from strict recursiveness, we allow credit to be contemporaneously affected by prices.14 15 For each variable, a 12-lag structure was imposed.
The model was estimated using monthly data over the period 1983–95. The sample period chosen covers only part of the period of the franc’s participation in the ERM. Specifically, it deliberately includes only the period of the hard currency policy, and excludes the period of experiments with reflationary policies in the early 1980s.
Empirical results
Empirical results are reflected in the so-called impulse response functions, which summarize the impact of a shock to the (orthogonal component of) each variable under consideration on all other variables of the system, including itself, over a specified period of time, thus capturing the essence of the transmission of monetary impulses across the economy (see SM/96/118 for more details).
The most striking conclusion that emerges from the impulse response functions is that the impact of the German rate and of the differential on the target variables, as well as on the intermediate transmission variables, is indeed substantially different (see Appendix I). With respect to the target variables, this difference is particularly pronounced in the case of output. Thus, a 1 percentage point increase in the German short-term rate is estimated to entail a depressing effect on output, which turns statistically significant 6 months after the shock and remains statistically significant thereafter (it gradually increases in the first 12 months after the shock, stabilizing thereafter).16
By contrast, this analysis does not identify a discernible effect on output of a shock to the interest rate differential: the respective point estimate is very close to zero, and the effect remains statistically insignificant throughout the simulation period. This result casts doubt on the widespread notion that raising interest rates in defense of the franc in periods of market pressure entailed substantial output costs. These results may reflect the historical behavior of the interest differential, where shocks last for just a few months. Simulations reflecting a somewhat different stochastic process indicate that a sustained increase in the short-term interest differential would have a significant impact on output. On the other hand, the point estimate of the impact of both components of the short-term interest rate on the price level is close to zero. The latter result lies somewhere in-between the finding of Sims (1992) of a persistent positive impact and that of Barran, Coudert and Mojon (1996) of a moderate, but significantly negative impact (the definition of significance in the latter paper is, however, weaker than that used here).
Chart 1 provides information on the relative quantitative importance of each component of the German rate and the French-German differential. The Chart shows the cumulative loss in output associated with a 0.5 percentage point shock to the German short-term rate and the interest rate premium, respectively. Thus an increase in the German short-term rate is estimated to entail a loss in output of some 0.3 percent within the first year following the shock (a one standard deviation confidence interval around this point estimate would put this effect approximately between 0.2 percent and 0.5 percent). By contrast, the corresponding cumulative output loss associated with a positive shock to the premium is estimated to be 0.1 percent.17
FRANCE: Cumulative Output Loss from a Half Percent Increase in Interest Rates
(In Percent of Annual GDP)
Citation: IMF Staff Country Reports 1997, 019; 10.5089/9781451813395.002.A003
Source: Staff calculations.FRANCE: Cumulative Output Loss from a Half Percent Increase in Interest Rates
(In Percent of Annual GDP)
Citation: IMF Staff Country Reports 1997, 019; 10.5089/9781451813395.002.A003
Source: Staff calculations.FRANCE: Cumulative Output Loss from a Half Percent Increase in Interest Rates
(In Percent of Annual GDP)
Citation: IMF Staff Country Reports 1997, 019; 10.5089/9781451813395.002.A003
Source: Staff calculations.A stronger impact of the German rate relative to the differential can also be identified for most intermediate transmission variables as well (Chart A1). Thus, a 1 percentage point increase in the German rate is estimated to have a pronounced positive impact on the long-term interest rate, with the effect peaking at some 0.9 percentage points and remaining statistically significant 10 months after the shock. By contrast, a shock to the differential has no discernible impact on the long-term rate, either in terms of the size of the point estimate and in terms of statistical significance.
Similarly, the impact of the German rate turns out to be larger with regard to the money and credit variables. Thus, a 1 percentage point increase in the German rate is estimated to have a substantial depressing impact on credit, which at the end of the simulation period stands some 5 percent below its baseline path; the effect is statistically significant during most of the simulation period. The same shock to the German rate is estimated to also have a sizeable negative impact on money; this latter effect, however, turns statistically significant only in the second year of the simulation period. These results provide a preliminary indication that the money and credit channels may play an important part in the transmission mechanism, with credit in particular being a major transmission channel. By contrast, the corresponding impact of a 1 percentage point shock to the differential is estimated to be much weaker. Specifically, the impact on money is essentially zero and statistically insignificant throughout the simulation period. While the impact on credit is statistically significant for part of the simulation period, the respective point estimate is very close to zero. The question of the relative strength of the money and credit channels is discussed in section D below.
With regard to the effective exchange rate, the estimated impact of the interest rate differential turns out to be stronger than that of the German rate, albeit only marginally. Specifically, a shock to the German rate is estimated to have a statistically insignificant effect on the nominal effective exchange rate throughout the simulation period. On the other hand, the effect of the differential turns out to be statistically significant during the first 6 months after the shock. The magnitude of the effect is, however, very small: a 1 percentage point rise in the interest rate differential is estimated to lead to a brief effective appreciation, with the effect peaking at some 0.5 percent above the effective exchange rate’s baseline path. Taken together, the results for both components of the interest rate would suggest that the effective exchange rate is a weak channel for the transmission of monetary policy shocks in the case of France.
With regard to the autonomous impact to shocks on the intermediate transmission channels, an autonomous appreciation of the effective exchange rate is estimated to exert a depressing impact on both output and prices, an effect which remains significant during most of the simulation period. Furthermore, an upward shock to the long-term interest rate is estimated to lead to a fall in output and prices, with both effects being marginally significant during part of the simulation period.
D. The Role of the Credit Channel
The credit channel can be expected to play an important role in monetary transmission if bank loans and bonds are imperfect substitutes as sources of financing for firms—a presumption typically justified on the grounds of asymmetric information and/or moral hazard arguments.18 Under these circumstances, it is worthwhile devoting some resources to monitoring, and delegating this to a specialized group of intermediaries, namely banks. A second important prerequisite is that banks must view bonds and loans as imperfect substitutes in their asset portfolios, so that they do not respond to a monetary tightening by running down their bond holdings to keep loan supply unchanged.19 A bank can be expected to hold a certain minimum level of liquid securities on precautionary grounds so as to be able to accommodate random deposit or withdrawals while still meeting reserve requirements. Thus, in general banks would not be indifferent to their relative holdings of bonds and loans. The existence of risk-based capital requirements (under which the risk weight on loans is higher than that on bonds) would tend to reinforce this argument (at least if these requirements are binding for some banks).
A number of considerations would suggest that the credit channel may indeed constitute a significant component of the transmission mechanism in France. In the first place, while recourse to commercial paper (an important type of non-bank financing in other countries) increased in the 1980s, the market remains small, suggesting that bank lending retains a dominant position in this regard.20 Secondly, the importance of small and medium-sized enterprises in total private sector value added could again lead one to expect a role for the credit channel, as these enterprises are traditionally viewed as being largely dependent on bank financing. Thirdly, the need faced by banks to improve their capital position in view of the phasing in of higher risk-adjusted capital requirements would suggest they would be reluctant to reduce their stock of securities in order to maintain loan supply unchanged under circumstances of a tightening of monetary policy.
The results of section C provided some preliminary empirical indications (in addition to the considerations made above) that the relative strength of the money and credit channels of monetary policy transmission may be worth exploring. The approach adopted in this section is an investigation along the lines suggested by Ramey (1993); 21 while not particularly rigorous, it has the advantage of being relatively simple to implement and interpret.22 Ramey’s method of assessing the strength of each monetary transmission channel essentially entails setting the coefficients that describe the impact of each transmission variable on the other variables of the system equal to zero (thus effectively “muting” the transmission channel in question), and comparing the resulting impulse response functions to the baseline impulse responses derived from the unrestricted VAR. The closer the “constrained” impulse response function turns out to be to the baseline impulse response, the weaker the transmission channel in question is postulated to be.
For the problem at hand, the relative strength of the money and credit channels in transmitting the impact of a shock to the German interest rate to economic activity are explored. Chart 2 presents the corresponding impulse response function derived from a system that in one case mutes the impact of the money channel and in the other case mutes the impact of the credit channel (along with the baseline impulse response function). The impulse response functions suggest that the money channel of monetary transmission is relatively weak. This would appear consistent with a view that emphasizes the endogeneity of the money stock in the case of an open economy in which the authorities are pursuing exchange rate stability. It also probably reflects the well-documented instability of money demand over the period under consideration; see for example Cassard, Lane, and Masson (1995).
FRANCE: Effect of an Increase in the German Interest Rate on Output
(“Money” Channel versus “Credit” Channel)
Citation: IMF Staff Country Reports 1997, 019; 10.5089/9781451813395.002.A003
Source: Staff calculations.FRANCE: Effect of an Increase in the German Interest Rate on Output
(“Money” Channel versus “Credit” Channel)
Citation: IMF Staff Country Reports 1997, 019; 10.5089/9781451813395.002.A003
Source: Staff calculations.FRANCE: Effect of an Increase in the German Interest Rate on Output
(“Money” Channel versus “Credit” Channel)
Citation: IMF Staff Country Reports 1997, 019; 10.5089/9781451813395.002.A003
Source: Staff calculations.The picture regarding the impulse response functions for the case of the credit channel is quite different. In this case, the estimated impulse response function that “constrains” the impact of credit to be zero is far (i.e., between one and two standard deviations) from the baseline impulse response. In fact, muting the credit channel results in virtually no impact of a change in the German interest rate on output. This result suggests that bank credit is an important potent channel of monetary transmission in France.
E. Conclusions
Two main conclusions emerge from the empirical findings in this paper. First, the decomposition of the French interest rate into a German rate and a premium over this rate reveals sharp differences between the effects of these two factors on certain key variables (both ultimate target variables and intermediate transmission variables). Differences are particularly striking with regard to real activity: while the German component of the French short-term interest rate turns out to have had a significant impact on real GDP, the estimation results fail to indicate a similar impact from the short-term interest differential. A ½ percentage point upward shock to the German rate leads to an output loss of about 0.3 percent within one year. Therefore, in assessing monetary conditions in France it would appear important to identify the origin of a given change in the French short interest rate. A temporary increase of the premium to defend the franc would have a much smaller impact on economic activity than a comparable increase in interest rates in core ERM countries (this impact of the premium would, however, be stronger in the case of a sustained shock). Second, on the question of how the impact of monetary policy is transmitted, it would appear that the role of credit is particularly important. This empirical finding is consistent with the significant role in the economy of small and medium-size enterprises (which rely predominantly in bank lending). It is also consistent with the view that banks would be reluctant to run down their holdings of securities to maintain loan supply in response to a monetary tightening, especially given constraints imposed by a need to strengthen their capital base.
APPENDIX I: Impulse Responses
The charts in the following pages present the estimated impact of a shock to the innovation of each variable (impulse) on all variables of the system, including itself, over a period of 24 months. Chart A1 shows responses to a 1 percent shock using a Cholesky decomposition; standard errors are computed using Monte Carlo simulations. Chart A2 contrasts the responses under the Cholesky decomposition (which imposes full recursiveness) with responses of the structural VAR described in the body of the paper.
FRANCE: Impulse Responses
(Asterisks Indicate Origin of Shocks)
Citation: IMF Staff Country Reports 1997, 019; 10.5089/9781451813395.002.A003
FRANCE: Impulse Responses
(Asterisks Indicate Origin of Shocks)
Citation: IMF Staff Country Reports 1997, 019; 10.5089/9781451813395.002.A003
FRANCE: Impulse Responses
(Asterisks Indicate Origin of Shocks)
Citation: IMF Staff Country Reports 1997, 019; 10.5089/9781451813395.002.A003
FRANCE: Impulse Responses
(Asterisks Indicate Origin of Shocks)
Citation: IMF Staff Country Reports 1997, 019; 10.5089/9781451813395.002.A003
FRANCE: Impulse Responses
(Asterisks Indicate Origin of Shocks)
Citation: IMF Staff Country Reports 1997, 019; 10.5089/9781451813395.002.A003
FRANCE: Results of a “Structural” VAR
(Asterisks Indicate Origin of Shocks)
Citation: IMF Staff Country Reports 1997, 019; 10.5089/9781451813395.002.A003
FRANCE: Results of a “Structural” VAR
(Asterisks Indicate Origin of Shocks)
Citation: IMF Staff Country Reports 1997, 019; 10.5089/9781451813395.002.A003
FRANCE: Results of a “Structural” VAR
(Asterisks Indicate Origin of Shocks)
Citation: IMF Staff Country Reports 1997, 019; 10.5089/9781451813395.002.A003
Each column of panels portrays responses to shocks in one variable (the variable shocked is marked with an asterisk and its name is indicated on the top of the column) on the other variables (which names are indicated in each row). Variable names, as well as their definitions, are listed in the table below.
List of Variables
| RHSG: | German call-money interest rate (Source: IMF) |
| RHSF: | French call-money interest rate (Source: IMF) |
| LBILATX: | Bilateral f/core E.M. currencies exchange rate, in logs (Source: IMF and staff calculations) |
| LNEER: | Nominal Effective exchange Rate, in logs (Source: IMF) |
| LCREDIT: | Credit to the Economy, in logs (Source: IMF) YIELF: Long-term (10 year) bond yield (Source: IMF) |
| LM1: | French stock of Ml, in logs (Source: IMF) |
| LPCP: | French consumer price index, in logs (Source: IMF) |
| LGDPIND: | Quarterly GDP (at constant price) interpolated using monthly industrial production figures, in logs (Source: INSEE) |
| DIFF: | RHSF - RHSG |
| RHSG: | German call-money interest rate (Source: IMF) |
| RHSF: | French call-money interest rate (Source: IMF) |
| LBILATX: | Bilateral f/core E.M. currencies exchange rate, in logs (Source: IMF and staff calculations) |
| LNEER: | Nominal Effective exchange Rate, in logs (Source: IMF) |
| LCREDIT: | Credit to the Economy, in logs (Source: IMF) YIELF: Long-term (10 year) bond yield (Source: IMF) |
| LM1: | French stock of Ml, in logs (Source: IMF) |
| LPCP: | French consumer price index, in logs (Source: IMF) |
| LGDPIND: | Quarterly GDP (at constant price) interpolated using monthly industrial production figures, in logs (Source: INSEE) |
| DIFF: | RHSF - RHSG |
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Prepared by Joaquim Levy and loannis Halikias.
See SM/96/118 for a description of the methodology.
See, for instance. Dale and Haldane (1993) on the United Kingdom, Escriva and Haldane (1994) on Spain, and Boeschoten, van Els and Bikker (1994) and Garretsen and Swank (1994) on the Netherlands.
Interpretation of the results is rendered more difficult by the fact that confidence intervals around the impulse response functions are not provided.
For a survey of the literature on the credit channel, with particular emphasis on its policy implications, see Alexander and Caramazza (1994).
Apart from this two-asset feature, the “money” channel is consistent with a wide variety of theoretical formulations. For instance, it is consistent with the textbook IS/LM model as well as with the dynamic equilibrium/cash in advance models of Rotemberg (1984). Grossman and Weiss (1983) and Lucas (1990)
Because this effect operates at the margin, it is valid even when reserve requirements are low (as in France).
See, for example, Bernanke and Blinder (1988, 1992) and Bernanke and Gertler (1995) for original formulations of such models Kashyap and Stein (1993) provide a good theoretical survey.
For a VAR model of the monetary transmission along these lines, see, for example, Taylor (1993).
Official rates form a “corridor” and hence at different points in time the ceiling rate (the 5-to-10 day repo rate), the floor rate (the intervention rate) may be binding, or none of the two may be binding.
No matter in which direction the causality might run.
The econometric technique follows closely Blanchard and Watson (1984), Bernanke (1986), and Sims (1986). To the extent that the a recursive structure is limiting only with regard to some variables, there is no need to completely discard the original ordering, which in itself reflects the way monetary policy is broadly presumed to be transmitted. Instead, marginal changes (i.e., in those variables where recursiveness is not considered an attractive assumption) are made in relation to the Cholesky orthogonalization.
All variables are included as logs, with the exception of the interest rate variables which are entered as a percent. The proxy for economic activity is constructed by interpolating quarterly GDP using monthly data on industrial production. A list of symbols, as well as a detailed description of the variables and data sources, is provided in the Data Appendix.
In order for the system to remain just-identified, we impose no contemporaneous feedback from credit to the long-term interest rate, from the long-term interest rate to prices, and from the franc/core ERM exchange rate to output. The relevant methodology to compute the factorization implied by the above restrictions is discussed in Doan, 1992, and Hamilton, 1994
An alternative structural VAR could entail restricting the long-run impact of aggregate demand shocks to be zero, along the lines of Blanchard and Quah (1989). This formulation is quite attractive in distinguishing between competing structural models of the economy. For the purposes of the present paper, however, as the impact of demand shocks was estimated to die out by the end of the simulation period, the relevant long-run restrictions would probably not be binding.
These results are robust to both a Choleski decomposition usin a different ordering of the variables under consideration, i.e., one that places the differential after the bilateral exchange rate, as well as to the relaxation of the assumption of full recursiveness (see Appendix I).
In fact the cumulative output loss over 2-year period is zero (see Appendix I).
These features of the market for bank loans were first analyzed in Blinder and Stiglitz (1983)
See, for example, Bernanke and Gertler (1987).
Recourse by French firms to domestic money market amounts to about 5 percent of the debt of these firms, negotiable instruments as a whole represent about 15 percent of total credit to firms.
Alternatively, one could directly test the microfoundations of the credit channel model using firm level data Unfortunately, data limitations in the case of France precluded such an approach In addition, in order to assess the quantitative importance of the credit channel in transmitting monetary policy shocks, a macroeconomic framework would appear to be indicated.
Given that the results of the previous section suggested that alternative identification restrictions do not materially alter the impulse response of shocks in interest rates, for the purposes of this investigation we use the Choleski decomposition.
