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Prepared by Anthony Annett (EUR).
The euro area sample (eight countries) is dictated by data availability on real house prices. Austria, Greece, Luxembourg, and Portugal are not included.
Here, and throughout this chapter, “credit” means “credit to total residents granted by monetary financial institutions (consolidated).” This was the only historical series available on a consistent basis for all countries from Eurostat.
The money series is longer than the credit series, spanning about 30 years, instead of only 20 for credit.
Indeed, Belgium was omitted altogether, for data availability reasons.
To capture demographic effects, the long-run equation was also estimated with the log of population as an explanatory variable. This variable did not yield a significant coefficient over the period analyzed; not did it affect any of the other coefficients or standard errors in any significant way. As population varied little in most countries over time (with the exception of Ireland), differences in population would likely be captured by the country fixed effects.
The source of these data is Guiliodori (2004).
Note that output gaps are notoriously difficult to measure in real time, which could lead to inappropriate monetary policy (Orphanides and van Norden, 2002).
By loosening in the bust phase but not tightening in the boom, monetary policy can foster excessive risk-taking on the part of investors (Illing, 2001).
A similar challenge in operationalizing the ECB’s monetary pillar is discussed in Chapter II.