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Cross-Country Dependence and Homogeneous Parameters in

Monetary Transmission Modeling

Rustam Jamilov*

ABSTRACT
This paper proposes an original empirical strategy for testing for monetary transmission
homogeneity in a large panel of OECD states with inherent cross-country correlations. For the
first time, cross-country dependence is explicitly accounted for with appropriate econometric
techniques. Serial correlation and endogeneity bias are corrected, and idiosyncratic countryspecific fixed effects are purged from the model. Panel cointegration estimation concludes that
aggregate output in OECD economies is positively affected by interest rates declines, monetary
loosening, exchange rate strengthening, wage increases, and expansions in bank credit provision.
No consistent results are found for determinants of inflation. Homogeneity in country-specific
transmission estimates is checked via a post-estimation test for parameter homogeneity, which
rejects strongly the null hypothesis of symmetric coefficients. This implies that channels of
monetary transmission in OECD economies remain heterogeneous even after eliminating the
idiosyncratic fixed effect, and convergence to a common transmission equation is not achieved.

Keywords: Monetary Transmission; Panel Cointegration; Cross-Sectional Dependence;


Homogeneous Parameters
JEL Classification: E52, C23, C29

Macroeconomic Research Division, Department of Research, the Central Bank of the Republic Azerbaijan, Baku,
Azerbaijan. E-mail: jamilovrustam@gmail.com; rustam_jamilov@cbar.az. I am thankful to Peter Pedroni for
valuable technical advice. Opinion presented in this paper belongs solely to the author and does not necessarily
reflect the viewpoint of the Central Bank of Azerbaijan.

1.

Introduction

The topic of monetary policy transmission has occupied researchers as well as practitioners for
many decades. The dynamics of transmissions vary substantially across countries, different
economic systems, and time intervals. Monetary policy transmission, the so-called black box,
has been the hottest topic in monetary theory for the past couple of decades, and it appears that
no definitive conclusion on this enigmatic area of economics will be reached any time soon
(Bernanke and Gertler, 1995). In similar fashion, researchers for years, but probably more so
after the European integration project accelerated in full capacity, were interested in the question
of symmetric responses to monetary shocks1. There are, in principle, three possible angles from
which one could attack the question of across-country monetary symmetry, and transmission
mechanism in general. A single-country study would display all the nuances of the domestic
economys workings and test symmetry vis--vis the rest of the world or a particular control
group2; an analysis of cross-correlations will disclose intertemporal dynamic of co-movements in
response parameters across countries in question3; multi-county Vector Auto Regression (VAR),
or its structural extension SVAR could offer direct separation of supply and demand shocks
and enable impulse response investigation4.
Another approach, one which would allow for a simultaneous analysis of many countries, is a
large cointegrated panel with heterogeneous cross-country components. This method, to the best
of our knowledge, has not been used very extensively in monetary transmission modeling.
However, quick glance shows that it carries some advantages over other techniques already
adopted in literature. Firstly, modern panel cointegration methodology will solve the problems of
endogeneity and serial correlation much too common associated with conventional econometric
strategies (Kao and Chiang, 2000). Second, we will be able to purge the model from countryspecific fixed effects, meaning that idiosyncratic elements are cleaned out and only common
tendencies remain. Third, and most importantly, a panel cointegration set-up will leave the field
for a simple and straightforward test for symmetric responses to a monetary policy shock
(Pedroni, 2007). This post-estimation test for parameter homogeneity is more robust than
conventional cross-correlation analysis and will let us conclude whether a particular transmission
mechanism converges to a single homogeneous equation in the long run. Our panel cointegration
approach will prove to be exceptionally useful for this purpose, since the main focus of this
method is precisely on the long-run estimates. At the very least, we envision that the
methodological strategy proposed in this paper will serve as a viable and useful alternative.
An important nuance, which surprisingly doesnt receive enough literature attention, is the
presence of cross-section correlation in multi-country monetary transmission studies. While all
studies explicitly claim that some degree of correlation is desired and indeed present, few
considered that strongly correlated cross-sectional components may actually lead to erroneous
results in any cointegration analysis. In particular, most studies have employed first or second
generation econometric tests (tests for unit root or cointegration) which do not allow for strong
correlation (dependence) among cross-sectional components, i.e. countries. In general, there
exists a rather strict assumption of independent distribution of cross-section parameters, which is
of course not always the case in reality (Pesaran, 2006). This paper appears to be the first attempt
1

The symmetry narrative has essentially evolved from the seminal contribution by Mundell (1961). The optimum
currency theory later led to extensive theoretical and empirical testing of whether a common monetary paradigm
indeed exists, and if yes how we can measure it effectively.
2
Some examples of single-country studies include Juselius (1998) for Germany, Denmark and Italy, Hubrich and
Vlaar (2004) for Germany and the Euro area, Corra and Caetano (2012) for Brazil.
3
Consider, for example, Cohen and Wyplosz (1989), Weber (1990), and Darvas and Szapary (2004) for correlation
analysis of the Eurozone. Almost all papers in this stream have employed data de-trending using the HodrickPrescott filter (Hodrick and Prescott, 1980) or the King Band-Pass filter (Baxter and King, 1999).
4
Blanchard and Quah (1989) were the first to develop this technique. Papers by Bayoumi and Eichengreen (1993),
Holtemoller (2004), Velickovski (2012) among many others have built on this strategy.

to introduce explicitly in terms of concrete econometric procedures the cross-dependency prism


into the stream of monetary policy transmission literature. We are using member-states of the
Organization for the Economic Cooperation and Development (OECD) as a case study for which
there is quite a strong argument for structural cross-dependence.
OECD economies, by and large, except for some certain idiosyncratic differences, are quite
similar developed states on the highest end of the global economic spectrum. Economies of this
caliber have extensive domestic consumption bases, developed financial markets, considerably
free and capitalistic establishments with a thriving investment climate. Table 1 provides basic
data summary for OECD states. Its only natural to suspect that there is some, if not a lot of,
commonality in the dynamics of monetary transmission in OECD states because their internal
markets are very homogeneous by design.
One way or another, the interconnectedness and cross-correlation of states belonging to the
OECD, be it legal/formal/informal/institutional, creates an economical case for substantial
commonality and correlation across monetary and financial parameters in OECD countries. In
turn, this constitutes a technical necessity to account for this confounding relationship between
cross-section parameters (countries) in any study which puts these similar states into a single
groupped set-up; this relationship pollutes the conventional econometric tests with the presence
of cross-dependence the phenomenon that first and even some second generation tests are not
built to account for. Introduction of the cross-sectional dependence angle is necessary both for
purely technical reasons, and also from the reality of the similar transmission dynamics of OECD
economies. Of course, while our a priori expectations of considerable cross-country dependence
may be strong, any final verdict on the matter will be achieved with a formal test for crosssectional dependence in Section 3.
It is vital to highlight that it doesnt matter how the traditionally accepted results will change in
response to the introduction of the cross-dependency prism. This papers proposition is an
improvement in the econometric method, not an attempt to seek different results. Ex ante, its
impossible to predict how the transmission dynamic will behave in the presence of crosssectional dependence. Its probable that some of the test results obtained will deem our series as
stationary or will fail to confirm cointegration. However, achieving implausible results does not
justify not introducing the cross-dependency dimension, because this is the more correct thing to
do. Its equally important that more studies will adopt this angle because the modern
econometric capacity is fully there to account for it.
Even when accounting for cross-country correlation and all other technical procedures properly,
it doesnt necessarily follow that a particular channel of monetary transmission will behave
homogeneously after eliminating the country-specific fixed effects. In other words, its important
to know whether transmission parameters converge into a single homogeneous framework after
we take away the fixed effects component. The technical procedure permitting this robustness
check is the post-estimation F-test for homogeneity of the parameters. If the country estimates
are proven to still differ in a statistically significant manner after we purge the model from
heterogeneous effects, then the model itself is not homogeneously distributed across countries,
i.e. OECD economies operate on different monetary transmission frameworks. In other words,
the strategy laid out in this paper allows us to tackle the age-old question of monetary symmetry
in a technically efficient and comprehensive way.
Our own a priori expectation on this matter is rather ambiguous. Recent research points out that
monetary policy-makers devise monetary reaction packages while keeping in mind the
peculiarities of the domestic growth design (Jamilov, 2013). In principle, in a group of countries
that are largely resembling each other in structure and growth composition, monetary policy
transmission should converge into a single long-run formula, similar for all members of the

supposedly homogeneous group5. However, Cicarelli and Rebucci (2006) claim that for some of
the largest European economies (Germany, France, Italy, and Spain) there is no substantial
evidence in favor of a common, homoskedastic monetary policy mechanism. Moreover, they
find that cross-country differences in the responses to a monetary shock have not changed, if not
increased, since early 1990s. In addition, Dedola and Lippi (2005) examine five largest
economies of Europe and find that significant cross-industry differences in the effects
of monetary policy are found. To the best of our knowledge, nobody has ever examined
symmetry in such a large panel of OECD economies, but based on existing empirical literature
we lean towards parameter heterogeneity as the most probable result of our test for symmetry.
2.

Channels of Monetary Transmission

There are 5 channels of monetary transmission that we will distinguish and investigate in this
paper: the interest rate channel, exchange rate channel, monetary channel, wages channel, and
the credit channel. The interest rate channel is usually the most influential for advanced
economies of Europe (Velickovski, 2012) as well as for developed countries in general (Egert
and MacDonald, 2009). Since in this paper we are focusing on OECD states, a set of highly
developed and advanced economies, we have prioritized this channel by including 3 subcategories which differ according to maturity. The broader interest rate channel will be
represented by the immediate, short-term, and long-term interest rate channels. The immediate
interest rate channel describes the rates of instruments of the most liquid and short-term maturity
available. OECD Statistics includes instruments such as call money and interbank loans into this
category. Short-term rates typically relate to interbank rates, Treasury bills, and certificates of
deposits, all of 3-month maturity. Long-term rates are yields of 10+ year bonds.
The exchange rate channel of monetary transmission is viewed as an important channel in the
context of developing countries (Juks, 2004). By performing direct interventions into the foreign
exchange market, monetary policy makers can achieve a desirable level of the exchange rate.
The exchange rate will, in turn, affect aggregate production via the current account channel, by
influencing the costs of imported and exported goods and their relative price-based trade
competitiveness. In addition, in countries where domestic agents tend to hold debt denominated
in foreign currency, exchange rate fluctuations can have a substantial effect on the agents debt
portoflios and thus their overall balance sheets economies (Coricelli et al., 2006). However,
increased exchange rate flexibility may potentially break the linkage between exchange rates and
prices, resulting in the exchange rate channel being less important for advanced economies (Kara
et al., 2005). The exchange rate tool should not be relied on too often as it affects monetary
credibility and, as a result, destroys stable nominal anchoring and normal inflation expectations
(Kydland and Prescott 1977) In this paper, we will incorporate exchange rate channel via the
nominal bilateral exchange rate of respective national currencies vis--vis the U.S. dollar.
The monetary channel has not been a regular inclusion in the discussion on channels of monetary
transmission per se. Monetary aggregates are usually viewed as an indirect measure of monetary
policy. National banks rarely target monetary base as the end goal, but rather tweak money
supply in order to achieve the desired break-even interest rate via open-market operations. Still,
broad money should be perceived as an indirect predictor of real economy variables, or at least
theoretically, as part of the broader liability side approach to monetary transmission modeling.
In particular, it is always expected that nominal money will be an important factor for inflation
determination (Friedman and Schwarz, 1963). We will include the monetary base in our analysis
by using the M1 monetary aggregate.
5

On the other hand, it is always possible that excessive integration of market forces will lead to more effective
specialization and, as a result, divergence across supposedly homogeneous countries in terms of industrial shocks
(Krugman, 1993). This, in turn, feeds country-specific effects and attenuates the power of the common factor.

Wages, or more concretely the growth rate of wages represents the cost, or the supply side of
the nominal economy. We acknowledge the fact that neither the minimum wage nor the nationwise growth rate of wages is typically in the hands of monetary policy-makers, thus cannot be
attributed to the monetary transmission framework as such. However, its important to keep
wages in the list of potential determinants of inflation and aggregate output more as a
representative measure of the supply side of the economy, something which will make our
analysis more complete. Moreover, in our dataset the correlation between wages and aggregate
consumption is 24%, suggesting that wage volatility can explain relatively well the dynamic of
consumption an important factor of GDP generation in consumption-dependent developed
OECD economies. Finally, research shows that wages do indeed play an important role in
macroeconomic variables determination (Agayev, 2011). The inclusion of average annual
wages as an additional transmission channel should therefore prove to be beneficial.
The final channel of monetary transmission estimated in this paper is the credit channel. Or, to
be more precise, the bank lending sub-channel of the broader credit view. The credit channel
dogma postulates that monetary policy-maker, in addition to controling traditional supply-driven
policy tools, can also tweak supply of credit in the economy provided by the bank sector. By
adjusting monetary policy rates, the central bank affects banks market risk perception and the
desire to lend out funds, which in turn carries an effect on the real economy (Bernanke and
Blinder, 1988; Bernanke and Gertler, 1995; Kashyap and Stein, 1995; 2000). We incorporate the
bank lending channel via credit granted by the bank sector. An increase in this variable,
therefore, should trigger nationawide credit expansion and consequently a positive response from
GDP and inflation.
All data which was used in this study is described in detail in Table 2. The choice of periods has
been restricted by availability of the data, and the sample size has been maximized and
optimized given the data constraints. The rest of this paper will proceed as follows: Section 2
describes the econometric methodology employed. Section 3 reports the results. And Section 4
concludes.
[INSERT TABLE 2 HERE]
3.

Empirical Methodology

This paper does not intend to introduce an innovative theoretical model of monetary
transmission. Instead, we adopt a simple, conventional model of transmission and propose to
improve on the empirical estimation of the existing function. We re-emphasize that the focus of
this paper is direct introduction of cross-sectional dependency into estimation procedures and a
posterior test for transmission symmetry. The simple global model proposed for the estimation
phase describes the following mechanism:
, ,

, ,

, ,

(1)

where is the macroeconomic dependent variable, is the vector of variables corresponding to


a given channel of monetary transmission, is the macroeconomic control variable, represents
the idiosyncratic country-specific fixed effect, is the error term, i is the country index, t is the
time dimension, j is the channel of monetary transmission index. , , , and
are the
constant and the three coefficients, respectively. The primary coefficient of interest is , which
represents the impact on the macroeconomic variable of an innovation in a given transmission
channel variable. During the estimation phase, the component will be purged from the model.
There are two macroeconomic variables used in this study: GDP and CPI. Gross Domestic
Product represents aggregate demand and the Consumer Price Index is proxying the level of
prices. Whenever we will be using one of the macro variables as dependent, the other will be

automatically included into the general regression as the control independent variable. We will
estimate the same baseline model in (1) for every channel of monetary transmission while
sequentially changing the variable. For example, in the case of estimation of the effect of the
immediate interest rate on GDP, we will use the corresponding transmission independent
variable as explained in Table 1, include CPI as a control variable, and estimate the regression
using a panel cointegration technique for every country in the sample as well as for the global
panel. Panel Fully Modified OLS and Panel Dynamic OLS methods will be employed for the
estimation stage.
There are some preliminary econometric tests which are required on our part before we can
proceed with the actual estimation. First, we must test our panels for cross sectional dependence.
This is above all a technical necessity, since first and even second generation unit root tests for
panels fail to account for dependency across sectors (in our case sectors stand for concrete
OECD countries). Secondly, there is also economic logic behind the possibility of monetary
responses across countries being correlated, as discussed in Section 1. In order to test for crosssectional dependence, we perform the Pesarans Cross-Dependence test (CD) which is very
appropriate to small samples when the T dimension is small (Pesaran, 2004). Unlike the more
famous Breusch and Pagans LM test for cross-dependency (Breusch and Pagan, 1980), the
Pesarans statistic has exactly mean zero for xed values of T and N, under a wide array of panel
data models, including heterogeneous dynamic models. The application of this test to our case of
a heterogeneous panel is particularly relevant. The Pesarans CD test can be formulated as
follows6:

(2)

where p!" is the sample estimate of the pair-wise correlation of residuals.


Should the panel of OECD countries indeed suffer from cross-sectional dependence, the
traditional unit root and cointegration tests would be invalid. In that case, we will employ the
cross-dependency augmented unit root test for panels, or the so-called CIPS test (Pesaran, 2006).
For an observation on the ith cross-section unit at time t, consider a simple dynamic linear
heterogeneous panel data model7:
#, = 1& ' +& #,

+ ( , , * = 1, , ,; . = 1, , /

(3)

0 +

(4)

where initial value, # , , has a given density function with a finite mean and variance, and the
error term, ( , , has the single-factor structure
(, =

in which 0 is the unobserved common effect, and

is the individual specific error.

It is more comfortable to re-write (3) and (4) in the following form:


# , =

#,

0 +

where
= 1& ' ,
= 1 & and # , = # , # ,
which is relevant, & = 1, can be expressed as
2:

= 0 for all i

(5)
. The unit root hypothesis
(6)

6
For a more thorough technical discussion of both the Breusch Pagan and the Pesaran CD tests, consult Pesaran
(2004).
7
Consult Pesaran (2006) for a detailed discussion of the CIPS unit root test for heterogeneous panels.

against the alternatives:


2:

< 0, * = 1,2, , , ,

= 0, * = , + 1, , + 2, , ,

(7)

Having tested for cross-sectional dependence and performed the dependency augmented unit
root test, we now perform a test for panel cointegration. Given the presence of cross-dependence
in the panels sectional components, we must turn to a test that explicitly takes this technical
nuance into account. One such method is the error-correction based Westerlund cointegration
test (Westerlund, 2007). The Westerlund test presents four test statistics. Two of the statistics are
based on pooling the information regarding the error correction along the cross-sectional
dimension of the panel. These are referred to as panel statistics. The second pair does not
exploit this information and are referred to as group mean statistics. For the panel statistics,
with
being the error correction term, the null and alternative hypotheses are formulated as
7
2 : = 0 for all * versus the alternative 2 : = < 0 for all *, which indicates that a
rejection should be taken as evidence of cointegration for the panel as a whole. By contrast, for
8
the group mean statistics, 2 : = 0 is tested versus 2 : = < 0 for at least some *,
suggesting that a rejection should be taken as evidence of cointegration for at least one of the
cross-sectional units. The Westerlund test is useful for our case because it explicitly incorporates
bootstrapping which allows for correlation among cross-sectional units.
Now, assuming that the panel sections are non-stationary and cointegrated, and that crosssectional dependence is correctly tested and corrected for, we can estimate the long-run impacts
of monetary changes on the macroeconomic aggregates of individual OECD states and of the
panel as a whole. To that end, we employ the Panel Fully Modified OLS (PFMOLS) and Panel
Dynamic OLS (PDOLS) methods. The PFMOLS approach takes care of the spurious regression
problem which arises in standard OLS models, in addition to correcting for serial correlation and
the endogeneity of regressors (Pedroni, 2000; 2004). In order to estimate the long-run
cointegrating equation, we must first consider the following panel regression:
Y!: = ! + X!: + u!:

(8)

for i=1,N, t=1,T; and where yit is a matrix (1,1), is a vector of slopes, ! is individual
fixed effect, u!: - stationary disturbance. The vector x!: is an integrated process of order one, for
all i, and is defined as follows:
=X
+
(9)
The PFMOLS estimator itself is constructed in a way that the two chief problems associated with
standard OLS estimation (endogeneity and serial correlation) are properly corrected for. The
estimator is defined as:
@ABCDE = F @ H = F

IJ

K K

IJ

IJ

K K ' /

(10)

where ! is the serial correlation correction term, !: is the endogeneity correction, L11i and L22i
are the lower triangular matrices of the scalar long run variance of the residual it and m x m
long run covariance among the !: , respectively.
From the PFMOLS panel estimator we can derive t-statistics which are asymptotically normally
distributed (Pedroni, 2004). The null hypothesis for such t-test is H0: i=0 for all i versus the
alternate hypothesis Ha: i=a0; where 0 is some value for under the null hypothesis, and a
some alternative value for which is homogeneous across all the members of the panel. The tstatistic can be constructed using the following equation:


.PQRS
= F @ HF

IJ

K K

(11)

The PDOLS estimator is equally effective at eliminating the endogeneity and serial correlation
issues. PDOLS is deemed to be more powerful for small samples and tends to outperform
PFMOLS (Kao and Chiang, 2000). The PDOLS estimator engineers a parametric adjustment to
the error terms by including the past and the future values of the differenced regressors. This
allows us to get unbiased long-run parameters. The following equation is needed to obtain the
DOLS estimator:
# =

+K

VW
VX U

K ,

+Y

(12)

where U is the coefficient of a lead or lag of first differenced explanatory variables. The DOLS
estimator itself is given by the following formulation:
@ZCDE =

where z!: = [x!: x^! , x!,: _ , , x!,:

_]

[ [ H

[ #

(13)

is the 2(q+1)x1 vector of regressors.

Finally, after estimating the long-run impact of a monetary shock on macroeconomic aggregates
in our OECD panel set-up, we will look at the nature of the coefficients obtained. Specifically,
we want to test if the parameters are hetereogeneous even after accounting for individual
country-specific fixed effects. In other words, the question is whether convergence of individual
country parameters is consistent with a single monetary transmission framework. Failing to
reject the hypothesis of heterogeneity would imply that our monetary policy transmission model
(1) behaves heterogeneously as a function, and each country in our analysis has an internally
different monetary response dynamic. This test will therefore have important policy implications
for policy-makers in OECD states. To test for parameter heterogeneity we follow Pedroni (2007)
and employ a simple F-test for heterogeneous coefficients. The test produces a Wald statistic
which compares the sum of squared errors for the restricted case when 1 = for all i against the
case with unrestricted heterogeneous ! values. The null hypothesis is parameter homogeneity,
H0: 1 = for all i.
4.

Results

Presentation of results begins with our preliminary tests. Table 3 reports the outcome of the
Pesarans CD test for dependency of cross section components. We structure our representation
in a way that every series in every channel of transmission is correctly tested. The null
hypothesis is cross-sectional independence. The substantially high CD coefficients and the
corresponding p-values of zero indicate that the alternative hypothesis of cross-dependency
prevails. Moreover, the last two columns of the table indicate the correlation terms of crosssectional components. The figures occasionally reach high 90s, suggesting that the degree of
correlation of parameter movement across countries is considerably high. All in all, there is a
strong case for cross-country correlation among monetary transmission parameters in OECD
economies. Not accounting for it would be both economically non-pragmatic and technically
incorrect. This basically confirms our ex ante expectation and rationale.
[INSERT TABLE 3 HERE]
Results of the cross-dependency augmented CIPS panel unit root test are available in Table 4.
Once again, we apply the test to each transmission channel and look at every variable
individually. The null of unit root cannot be rejected in most of the cases, and there is no channel
in which all variables are stationary. We once again emphasize that purity of the outcome is
secondary to the choice of the correct method. To the best of our knowledge, the CIPS unit root

test is the only technique available in an organized and publicly available coded format, which
takes into account the very strong presence of cross-country dependence in our panel.
[INSERT TABLE 4 HERE]
The Westerlund panel cointegration test results are reported in Table 5. The table presents the
two general cases of regressions: when the dependent variable is GDP and when it is CPI. We
impose 50 replications on the bootstrapping option, which accounts for any existing correlation
between the cross-section components (which is, of course, true in our case). The five
transmission channels are again examined one by one. Results of the panel and group mean
statistics lead basically to the same conclusion for any given channel; there is no heterogeneity
across the two pairs of tests. For the model where CPI is the dependent variable, practically all
channels exhibit strong cases of long-run cointegration. However, the situation is totally different
when GDP is the regressand. In practically all channels, the null of no cointegration is failed to
be rejected. On economic terms, this provides some basis for an argument that no monetary
transmission channel actually converges to some form of long run structural GDP-determining
equilibrium.
[INSERT TABLE 5 HERE]
The main empirical findings of this paper are summarized in Table 6. Panel outcomes from the
FMOLS and PDOLS methods for all six monetary transmission channels are presented, and a
basic rank of the most influential determinants of GDP and CPI is constructed. Wages appear to
be the most powerful predictor of GDP for all OECD economies. There is a positive and
statistically significant effect of a rise in average annual wages on GDP, and the absolute value
of the wages coefficient is the highest among all other channels. The monetary base plays the
role of a supporting channel. For the second case, when CPI is the dependent variable,
determination of the key factors of inflation is not that easy. The largest coefficient, in absolute
value, corresponds to the exchange rate channel. However, the PDOLS model estimate is not
significant, and it is known that the PDOLS method outperforms PFMOLS in small sample
sizes. Basing on the PFMOLS estimate alone, we can conclude that depreciation in the domestic
currency (a rise in the NCU/USD bilateral exchange rate) leads to a CPI decline. The monetary
channel estimates, although ranked second in the table, are not significant in either of the two
estimation methods. We therefore propose not to draw any conclusions based on them. The
wages channel, ranked third in importance, is again statistically significant.
Table 6: Summary of the Main Estimation Results
Channel/Dependent Variable
Immediate Interest Rate Channel
Short-Term Interest Rate Channel
Long-Term Interest Rate Channel
Monetary Base Channel
Exchange Rate Channel
Wages Channel
Credit Channel

FMOLS
-0.05*
-0.06
-0.08*
0.29*
-0.06*
0.81*
0.02*

GDP
DOLS
-0.05*
-0.07
-0.09*
0.28*
-0.09*
0.83*
0.02*

Rank
6
5
3
2
4
1
7

FMOLS
0.34*
0.23
0.04*
-2.76
-4.17*
-1.26*
-0.01*

CPI
DOLS
0.45*
0.09
0.05*
-1.30
-3.11
-1.11*
-0.02*

Rank
4
5
6
2
1
3
7

Note: *- indicates statistical significance at the 1% level.

It is interesting that despite the famous inflation is always, everywhere a monetary


phenomenon argument, our monetary base indicator has no significant effect on prices
(Friedman and Schwarz, 1963). This observation is possible if we consider that in OECD
economies, with powerful fiscal apparatus and enduring deficit issues, inflation is not always

referring to the persistent increase in price levels (as M. Friedman envisioned) and fiscal
authorities are de facto drivers of the endogenous monetary policy (Mishkin, 2010). Overall, for
predicting both GDP and CPI, wages seem to be the most adequate factor. The monetary base is
a secondary channel for aggregate demand while the exchange rate is a supporting channel for
inflation.
Another noteworthy observation from Table 6 is the role of the interest rate channel of
transmission which, for the reasons outlined in Section 1, should be the dominant channel for
most developed economies, such as the OECD states. For the case of GDP being the dependent
variable, the importance of the interest rate channel rises with maturity. In other words, the
coefficients for the long-term interest rates are higher than for short-term rates which, in turn, are
larger than for the immediate interest rate channel. The simplest mechanism through which
interest rates affect output is aggregate investment. If the impact of interest rates on aggregate
output rises with maturity, then so does the orientation of domestic investment. In other words,
OECD economies are built on investment schedules of long-term nature, and volatility in longterm interest rates has a larger long-run impact on aggregate production via the investment
channel. Meanwhile for inflation, the coefficient interplay is exactly the reverse. The shorter the
maturity of the interest rate instrument, the higher the impact of its innovation on the CPI. This
implies that unlike output, inflation can be better explained by the shorter-term factors such as
rates on interbank credit.
Tables 7 through 13 report the results for individual transmission channels. For each table, the
corresponding independent variable of interest can be found in Table 2. Immediate interest rates
have a consistently negative and significant effect on output across all 17 OECD economies in
the sample, while the impact on inflation is slightly heterogeneous across the states (Table 7). It
is quite peculiar that only for Anglo-Saxon states (Canada, New Zealand, United Kingdom) the
effect of a rise in immediate rates leads to a decline both in GDP and CPI, while for all other
countries the inflation effect is positive. A similar picture is observed on Table 8 of the shortterm interest rates. The impact on GDP is systematically negative and significant; for Canada,
New Zealand, and United Kingdom the effect on CPI is strongly negative according to both
PDOLS and PFMOLS methods, while for all other countries the coefficients are either totally
positive or differ across the two estimators. Long-term interest rates have an equally consistent
negative and significant effect on aggregate output, and the case of inflation displays
heterogeneous results for which we see no apparent pattern (Table 9). In general, the interest rate
channel of transmission in OECD states has a systematically negative relationship with
aggregate production, but the effect on inflation is rather mixed.
[INSERT TABLES 7, 8, and 9 ABOUT HERE]
Table 10 presents the outcome from the monetary channel estimation. For every country in the
sample, as well as for the global panel overall, an increase in the monetary base would lead to a
rise in aggregate production. The elasticity of the response is approximate 0.3, implying that a
1% expansion in narrow money would cause domestic GDP to grow by 0.3%, ceteris paribus.
The story is not so clear cut for CPI, as the panel estimate is not significant, and individual
country figures are heterogeneous both in magnitude and direction of impact.
[INSERT TABLE 10 HERE]
The exchange rate channel of transmission estimation results are reported in Table 11. The
independent variable, the bilateral exchange rate vis--vis the US dollar, is structured in a way
that an increase in the variable will constitute a currency depreciation loss in value. For the
panel as a whole, depreciation of the national currency units will bring a recession and deflation.
This is probably explained by the fact that devalued currencies in many of the countries in the
sample would be associated with capital flights, disinvestment, collapse in domestic financial

activity and ultimately an overall economic downturn. Another explanatory reason could simply
be the peculiarity of the period in question. Individual-country estimates are quite heterogeneous.
[INSERT TABLE 11 HERE]
Table 12 presents the sixth channel of transmission the wages channel. Except for Japan, a rise
in average wages leads to economic growth with a very high, 0.81 positive elasticity coefficient.
The underlying dynamic of such relationship should be rather straightforward: real wages are the
primary factor of the consumers desire to spend, and consumption plays a big role in developed
OECD economies with broad domestic demand bases. As wages go up, so does the capacity of
OECD consumers to purchase goods and services; and since the relative weight of consumers in
any OECD economy is quite high, a hike in consumption instantaneously transforms into a
considerable boost to GDP. A potential contra-argument could always be that rising wages may
be caused by the general domestic inflation, i.e. an omitted variable bias persists and pollutes the
wage effect. However, inflation is included in our base model via the CPI control variable, and
regressor endogeneity is accounted for via the PDOLS and FMOLS methods anyway. In
addition, the Table displays responses of the macroeconomic variable to a positive innovation in
wages. But what happens when wages decline? Econometrically, it follows that a 1% decline in
nominal wages would cause an 0.86% deterioration in gross domestic product. Economically,
however, the theory of downward nominal rigidity of wages might suggest that the nature of a
contractionary wage effect might, in fact, be asymmetric. This shall not be studied in this paper
and is left for future research to exploit.
[INSERT TABLE 12 HERE]
At first glance, from Table 13 reporting the credit channel estimation results, it might appear that
bank credit has no substantial effect on economic growth. However, the independent variable
unit in this particular regression is percentage of domestic GDP. Naturally, we would expect a
much more considerable impact should bank credit expand by, say, 10%. For example, the
coefficient for Poland is a statistically significant 0.02, implying a 0.02% rise in Polish GDP for
any 1% increase in domestic bank-provided lending. In case of a more substantial (and realistic)
10% positive shock to bank lending, the impact on GDP would be a much more noticeable 0.2%.
All in all, however, bank-level credit is not found to be particularly important for GDP
determination in OECD economies. We once again fail to locate any apparent connection
between the transmission channel and inflation. For some countries the impact is positive, for
others it is negative. For the panel as a whole though it is predicted that an expansion in bank
credit would trigger a deflationary environment.
[INSERT TABLE 13 HERE]
The final culminating component of this paper is presented in Table 14, which summarizes
results of the post-estimation test in parameter homogeneity. The null hypothesis of
homogeneous parameters is strongly rejected, as evidenced by the large test statistics and zero pvalues. Transmission coefficients are heterogeneous in every channel, and convergence to a
single long-run monetary transmission equation is not achieved even when we purge the model
from the country-specific idiosyncratic component. In other words, the baseline model of
transmission in (1) is not functioning uniformly across OCED economies. This leads us to
believe that OECD economies are, by and large, heterogeneous economies with significant roles
in explaining transmission behavior played by domestic financial markets. At least over the past
two decades, the transmission dynamic in OECD states has been dispersed and driven by
unobserved domestic effects rather than by a converging force of some unique global monetary
transmission function. These findings are essentially in line with previous literature results and
our a priori expectations.

[INSERT TABLE 14 HERE]


5.

Conclusion

This paper has attempted to enrich the literature of panel studies on monetary transmission in
advanced OECD economies. The originality of this study is in the explicit introduction of the
cross-sectional dependence prism, which appears to have remained neglected by researchers.
There is a strong economic rationale for the presence of cross-country correlation of monetary
response parameters, as common business cycles, systemic macroeconomic events, and
similarities in economic structure drive the transmission channels in OECD economies in
parallel direction. In addition, the conventionally adopted first- and second-generation unit root
tests fail to account for any inherent dependence in cross-sectional elements, and omission of the
cross-dependency analysis is fallacious on technical grounds as well. A quick test for crosssectional dependence rejects strongly the hypothesis of cross-independence, proving our
economic rationale to be correct and creating a strong case for the usage of new, third-generation
tests which incorporate this technical nuance into the procedure.
Estimation of the baseline monetary transmission model has produced a coherent picture for the
scenario when GDP is the dependent variable, while the CPI case is substantially inconclusive.
GDP is positively affected by interest rate declines, monetary base expansions, exchange rate
appreciations, rises in average domestic wages, and growth in bank-sector credit. Wages,
furthermore, are found to be the strongest and most consistent long-run indicator of both output
and inflation. More broadly, this implies that labor and remuneration is an important factor of
economic activity in the long run, something quite natural by traditional standards in economics.
Money plays the role of a supporting channel for output, while exchange rate is a secondary
channel for inflation determination. The impact of interest rates on output increases with
maturity, i.e. aggregate output depends on the longer-term interest rates. For CPI, the shorter the
interest rate maturity the larger the impact on prices, suggesting that inflation is best predicted by
the short-term instruments such as interbank lending rates.
Finally, we propose a new and simple method for testing monetary asymmetry in a large
heterogeneous panel. A post-estimation test of parameter homogeneity has indicated that a great
degree of heterogeneity in the across-country transmission parameters exists. It appears that the
monetary transmission model that we have estimated does not converge to any single long-run
equilibrating formula. Instead, monetary transmission is found to be driven by domestic, internal
market forces of individual OECD states rather than by forces of global monetary integration.

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Table 1: Basic OECD Data Summary


GDP
CPI
LTIR
STIR
IMIR
ER
M1
WG
CRE

2005
35276769
2.58
3.84
3.19
4.34
96
100
3.77
185

2006
36386386
2.63
4.18
4.06
5.24
101
111
2.47
188

2007
37388350
2.50
4.60
5.03
5.44
93
122
3.85
190

2008
37443619
3.69
4.54
5.24
4.10
99
131
5.45
186

2009
36021957
0.54
3.95
1.97
2.06
114
147
4.36
202

2010
37171526
1.88
3.68
1.58
1.95
95
164
5.77
203

2011
37841407
2.89
4.08
1.91
2.24
95
179
4.52
203

Note: GDP refers to Gross Domestic Product (thousands, USD), CPI Consumer Price Index proxy of inflation (per
cent, year-average), LTIR long-term interest rate (per cent, year-average), STIR short-term interest rate (per cent,
year-average), IMIR immediate-term interest rate (per cent, year-average), ER exchange rate (indexed, OECD
base year 2000), M1 M1 monetary aggregate (indexed, OECD base year 2000), WG average wage growth (per
cent, year-average), CRE domestic credit granted by bank sector (per cent of domestic GDP, year-average).

Table 2: Model Variables Description


Variables Type
Dependent
Variables

Description
Gross Domestic
Product (GDP)

Consumer Price Index


(CPI)

Independent
Variables

Immediate Interest
Rate Channel
Short-Term Interest
Rate Channel

Long-Term Interest
Rate Channel
Exchange Rate
Channel
Monetary Channel

Wages Channel

Credit Channel

Details
US $, Constant Prices,
Constant PPP, OECD
Base Year, Annual, Endof-Year
All times included, %change on the same
period of previous year,
Annual, End-of-Year
Call Money and
Interbank Rates, Annual
Interbank Offer rates,
short-term Treasury
Bills, Certificates of
Depositm all 3-month of
maturity, Annual
Long term (in most cases
10 year) government
bonds, Annual
National units per US
Dollar,
Monthly
Average, Annual
Narrow Money (M1),
Index
2005=100,
Seasonally
Adjusted,
Annual
Average Wages, current
prices
in
National
Currency Unit, Annual
Domestic
Credit
provided by banking
sector (% of GDP)

Period
Channel-Specific

Channel-Specific

1994-2011
1993-2011

1994-2011

1991-2011

1994-2011

1991-2010

1993-2011

Note: all data was taken from Monthly Monetary and Financial Statistics (MEI), OECD.Stat or from the World
Bank.

Table 3: Cross-Sectional Dependence Test Results


Variable
GDP
IM
CPI
GDP
STIR
CPI
GDP
LTIR
CPI
GDP
M1
CPI
GDP
ER
CPI
GDP
WG
CPI
GDP
CR
CPI

CD-test
p-value
corr abs(corr)
Immediate Interest Rate Channel
46.27
0
0.969
0.969
28.69
0
0.601
0.601
11.02
0
0.231
0.336
Short Term Interest Rate Channel
0
0.974
0.974
70.52
0
0.314
0.37
22.73
0
0.678
0.69
49.12
Long Term Interest Rate Channel
0
0.971
0.971
59.71
0
0.391
0.42
24.05
0
0.795
0.799
48.86
Monetary Channel
44.76
0
0.963
0.963
10.97
0
0.236
0.328
44.33
0
0.954
0.954
Exchange Rate Channel
51.79
0
0.969
0.969
16.65
0
0.312
0.395
20.64
0
0.386
0.476
Wages Channel
60.47
0
0.981
0.981
30.49
0
0.495
0.501
53.63
0
0.87
0.905
Credit Channel
0
0.972
0.972
64.41
0
0.507
0.661
33.61
22.41
0
0.338
0.392

Note: Null hypothesis is zero cross-sectional dependence.

Table 4: Cross-Dependence Augmented CIPS Unit Root Test Results


t-bar

cv10

cv5

cv1

Z(t-bar)

P-value

GDP
CPI
IM

-1.70
-2.02
-1.65

-2.1
-2.1
-2.1

-2.21
-2.21
-2.21

-2.4
-2.4
-2.4

0.11
-1.17
0.27

0.54
0.12
0.61

GDP
CPI
STIR

-1.41
-1.92
-3.03

-2.1
-2.1
-2.1

-2.15
-2.15
-2.15

-2.32
-2.32
-2.32

1.54
-0.89
-6.22

0.93
0.18
0

GDP
CPI
LTIR

1.28
-1.86
-0.00

-2.1
-2.1
-2.1

-2.15
-2.15
-2.15

-2.32
-2.32
-2.32

-2.05
-0.56
7.77

0.98
0.28
1

GDP
CPI
M1

-1.32
-2.71
-2.00

-2.1
-2.1
-2.1

-2.21
-2.21
-2.21

-2.4
-2.4
-2.4

1.58
-3.85
-1.07

0.94
0
0.14

GDP
CPI
ER

-1.47
-2.95
-1.83

-2.1
-2.1
-2.1

-2.21
-2.21
-2.21

-2.38
-2.38
-2.38

1.18
-5.10
-0.37

0.88
0
0.35

GDP
CPI
WG

-1.99
-2.56
-2.66

-2.1
-2.1
-2.1

-2.21
-2.21
-2.21

-2.4
-2.4
-2.4

-1.17
-3.66
-4.10

0.12
0
0

GDP
CPI
CR

-1.29
-1.98
-1.61

-2.1
-2.1
-2.1

-2.15
-2.15
-2.15

-2.32
-2.32
-2.32

2.03
-1.10
0.59

0.97
0.13
0.72

Immediate

Short-Term

Long-Term

Money

ER

Wages

Credit

Note: Null hypothesis is series non-stationarity, i.e. presence of a unit root.

Table 5: Westerlund Cointegration Test Results


Statistic Value z-value p-value robust Statistic Value z-value p-value robust
p-value
p-value
Dependent Variable: GDP
Dependent Variable: CPI
Immediate Interest Rate Channel
0.73
6.58
1.00
1.00
-1.89
-3.52
0.00
0.00
Gt
Gt
0.02
3.36
1.00
0.94
-5.39
-1.40
0.08
0.06
Ga
Ga
3.38
4.65
1.00
1.00
-4.34
-1.97
0.02
0.26
Pt
Pt
0.02
1.14
0.93
0.82
-3.67
-3.66
0.00
0.12
Pa
Pa
Short-term Interest Rate Channel
0.09
5.03
1.00
0.88
-1.39
-1.93
0.03
1.23
Gt
Gt
0.01
4.10
1.00
0.96
4.29
-0.53
0.30
0.10
Ga
Ga
1.87
3.74
1.00
0.96
-8.96
-5.54
0.00
0.00
Pt
Pt
0.01
1.76
0.96
0.76
-5.72
-7.95
0.00
0.00
Pa
Pa
Long-term Interest Rate Channel
-0.95
0.13
0.55
0.38
-1.94
-4.23
0.00
0.00
Gt
Gt
-0.04
3.79
1.00
0.84
-4.03
-0.23
0.41
0.26
Ga
Ga
-3.47
-0.97
0.17
0.22
-6.32
-3.41
0.00
0.06
Pt
Pt
-0.04
1.57
0.94
0.78
-3.71
-4.25
0.00
0.14
Pa
Pa
Monetary Channel
0.09
7.26
1.00
1.00
-2.50
-5.88
0.00
0.00
Gt
Gt
0.15
3.48
1.00
1.00
-5.94
-1.88
0.30
0.00
Ga
Ga
2.28
3.71
1.00
1.00
-6.89
0.00
0.00
Pt
Pt -10.08
0.08
1.52
0.94
0.94
-3.67
-3.65
0.00
0.06
Pa
Pa
Foreign Exchange Channel
0.50
5.86
1.00
1.00
-2.38
-5.56
0.00
0.00
Gt
Gt
0.04
3.84
1.00
1.00
-7.51
-3.36
0.00
0.00
Ga
Ga
2.92
4.30
1.00
1.00
-6.12
-3.44
0.00
0.10
Pt
Pt
0.05
1.53
0.94
0.84
-4.32
-4.69
0.00
0.06
Pa
Pa
Wages Channel
0.36
5.74
1.00
0.98
-2.43
-6.26
0.00
0.00
Gt
Gt
0.41
4.14
1.00
0.98
-5.68
-1.84
0.03
0.00
Ga
Ga
0.61
2.48
0.99
0.78
-8.70
-5.50
0.00
0.00
Pt
Pt
0.17
1.85
0.97
0.74
-5.90
-7.53
0.00
0.00
Pa
Pa
Wages Channel
-0.57
6.28
1.00
0.98
-2.57
-4.15
0.00
0.00
Gt
Gt
-2.11
4.32
1.00
0.98
-8.51
-1.18
0.11
0.00
Ga
Ga
-2.03
4.78
1.00
0.86
-4.68
0.00
0.04
Pt
Pt -11.44
-1.01
3.39
1.00
0.82
-7.45
-3.40
0.00
0.02
Pa
Pa
Note: Robust p-value was estimated from the bootstrap option with 50 replications. Null hypothesis is absence of
cointegration.

Table 7: Immediate Interest Rate Channel Estimation Results: 1994-2011


Country/Dependent Variable

Output
FMOLS
DOLS

Inflation
FMOLS
DOLS

Australia
Canada
Czech Republic
Hungary
Israel
Japan
Korea
Mexico
New Zealand
Norway
Poland
Sweden
Switzerland
Turkey
United Kingdom
United States
OECD-17

-0.12**
-0.07**
-0.04**
-0.02**
-0.03**
-0.04**
-0.05**
-0.01**
-0.04**
-0.04**
-0.02**
-0.06**
-0.07**
0.00**
-0.05**
-0.04**
-0.05**

0.07**
-0.08**
0.67**
0.92
0.51**
0.61
0.18**
0.84*
-0.04**
0.11**
0.95
0.20**
0.20**
0.73*
-0.31**
0.11**
0.34**

-0.16**
-0.10**
-0.04**
-0.02**
-0.03**
0.09**
-0.05**
-0.01**
-0.05**
-0.05**
-0.02**
-0.09**
-0.10**
0.00**
-0.07**
-0.06**
-0.05**

-0.67**
0.02**
0.54**
1.07
0.51**
2.88
0.17**
1.01
-0.19**
0.13**
0.87
0.04**
0.31**
0.80
-0.30**
0.06**
0.45**

Note: Independent variable is immediate interest rate. *, **-indicate statistical significance at the 5% and 1%
levels, respectively.

Table 8: Short-Term Interest Rate Channel Estimation Results: 1993-2011


Country/Dependent Variable

Output
FMOLS
DOLS

Inflation
FMOLS
DOLS

Australia
Austria
Belgium
Canada
Czech Republic
Denmark
Finland
France
Germany
Iceland
Ireland
Israel
Italy
Korea
Netherlands
New Zealand
Norway
Poland
Portugal
Spain
Sweden
Switzerland
United Kingdom
United States
OECD-24

-0.09**
-0.07**
-0.06**
-0.08**
-0.03**
-0.03**
-0.09**
-0.05**
-0.04**
0.04**
-0.14**
-0.04**
-0.02**
-0.05**
-0.07**
-0.04**
-0.05**
-0.02**
-0.03**
-0.05**
-0.06**
-0.06**
-0.05**
-0.04**
-0.06**

0.20**
0.11**
0.02**
-0.10**
0.64**
0.04**
0.05**
0.03**
0.22**
0.88
0.42*
0.57**
0.29**
0.20**
0.28**
-0.09**
0.17**
0.97
0.34**
0.34**
0.10**
0.24**
-0.31**
0.09**
0.23**

-0.12**
-0.12**
-0.10**
-0.11**
-0.03**
-0.06**
-0.15**
-0.08**
-0.07**
0.10**
-0.17**
-0.04**
-0.02**
-0.05**
-0.13**
-0.09**
-0.07**
-0.02**
-0.03**
-0.07**
-0.08**
-0.09**
-0.10**
-0.08**
-0.07**

-1.10**
-0.08**
-0.30**
-0.01**
0.55**
0.09**
-0.15**
-0.13**
0.05**
1.01
0.15*
0.55**
0.24**
0.14**
0.38*
-0.46**
0.13**
0.91
0.34**
0.18**
-0.06**
0.24**
-0.35**
-0.13**
0.09**

Note: Independent variable is short-term interest rate. *-indicates statistical significance at the 5% level.
*, **-indicate statistical significance at the 5% and 1% levels, respectively.

Table 9: Long-Term Interest Rate Channel Estimation Results: 1994-2011


Country/Dependent Variable

Output
FMOLS
DOLS

Inflation
FMOLS
DOLS

Australia
Austria
Belgium
Canada
Denmark
Finland
France
Germany
Iceland
Ireland
Italy
Japan
Netherlands
New Zealand
Norway
Portugal
Spain
Sweden
Switzerland
United Kingdom
United States
OECD-22

-0.12**
-0.09**
-0.08**
-0.09**
-0.05**
-0.08**
-0.07**
-0.05**
-0.02**
-0.12**
-0.02**
-0.03**
-0.10**
-0.18**
-0.09**
-0.03**
-0.06**
-0.06**
-0.11**
-0.09**
-0.10**
-0.08**

0.20**
-0.08**
-0.09**
0.01**
0.02**
-0.05**
0.00**
-0.02**
0.84
-0.34**
0.38**
0.26**
0.22**
-0.44**
0.12**
0.19**
0.22**
0.02**
0.29**
-0.20**
0.11**
0.04**

-0.17**
-0.11**
-0.09**
-0.10**
-0.05**
-0.10**
-0.09**
-0.06**
-0.02**
-0.15**
-0.03**
0.00**
-0.11**
-0.22**
-0.09**
-0.03**
-0.09**
-0.09**
-0.14**
-0.10**
-0.11**
-0.09**

-0.14**
-0.08**
0.03**
0.14**
0.17**
0.43**
-0.06**
0.00**
0.80
-1.00**
0.24**
0.85
0.51*
-0.85**
0.04**
0.15**
-0.05**
0.08**
0.01**
-0.35**
0.19**
0.05**

Note: Independent variable is long-term interest rate. *, **-indicate statistical significance


at the 5% and 1% levels, respectively.

Table 10: Monetary Channel Estimation Results: 1994-2011


Country/Dependent Variable

Australia
Canada
Chile
Czech Republic
Denmark
Israel
Japan
Korea
Mexico
New Zealand
Norway
Poland
Switzerland
Turkey
United Kingdom
United States
OECD-16

Output
FMOLS
DOLS
0.43**
0.32**
0.31**
0.32**
0.18**
0.27**
0.09**
0.41**
0.19**
0.34**
0.24**
0.29**
0.29**
0.10**
0.27**
0.52**
0.29**

0.44**
0.35**
0.32**
0.33**
0.17**
0.28**
0.07**
0.40**
0.16**
0.33**
0.23**
0.28**
0.33**
-0.01**
0.30**
0.62*
0.28**

Inflation
FMOLS
DOLS
0.44
0.30*
-1.73**
-2.99**
0.00**
-3.02**
-0.93**
-1.40**
-12.58**
0.84
-0.22**
-6.83**
-0.39**
-16.56**
0.64
0.58
-2.76

1.66
0.02
-0.57
-1.82**
-0.57**
-7.83**
-1.82**
-1.49**
-1.05
1.13
-0.17**
-5.25**
0.27
-15.62**
0.76
0.65
-1.30

Note: Independent variable is Narrow Money Index (M1). *, **-indicate statistical significance at the 5%
and 1% levels, respectively.

Table 11: Exchange Rate Channel Estimation Results: 1991-2011


Country/Dependent Variable

Output
FMOLS
DOLS

Inflation
FMOLS
DOLS

Australia
Canada
Czech Republic
Denmark
Hungary
Iceland
Israel
Japan
Korea
Mexico
New Zealand
Norway
Poland
Sweden
Switzerland
Turkey
United Kingdom
OECD-17

-0.38**
-0.42**
-0.59**
-0.15**
0.19**
0.58*
0.59*
-0.19**
1.06*
0.29**
-0.48**
-0.26**
0.18**
0.04**
-0.43**
0.09**
-0.93**
-0.06**

1.25
0.94
4.46
0.42
-13.54**
5.49*
-18.64**
2.55
-4.20**
-5.60*
-2.17*
0.95
-28.37**
-1.81
1.85
-9.88**
-3.23
-4.17**

-0.30**
-0.41**
-0.59**
-0.14**
0.13**
1.04
0.41**
-0.27**
1.05
0.31**
-0.51**
-0.27**
-0.06**
-0.01
-0.43**
0.05**
-1.53**
-0.09**

2.51
2.49
2.62
0.63
-12.23**
11.47**
-20.04**
0.41
-5.13**
-6.17*
-1.13
0.65
-19.19*
-1.34
1.37
-4.57*
-5.28*
-3.11

Note: Independent variable is Exchange Rate (NCU/USD). *, **-indicate statistical significance at the
5% and 1% levels, respectively.

Table 12: Wages Channel Estimation Results: 1991-2010


Country/Dependent Variable

Output
FMOLS
DOLS

Inflation
FMOLS
DOLS

Australia
Austria
Belgium
Canada
Denmark
Finland
France
Germany
Ireland
Italy
Japan
Korea
Luxembourg
Netherlands
Norway
Spain
Sweden
Switzerland
United Kingdom
United States
OECD-20

0.97
0.79**
0.77**
0.90
0.51**
0.87
0.72**
0.79**
1.19**
0.43**
-0.59**
0.83**
1.37**
0.87*
0.52**
0.88
0.78**
2.04**
0.82**
0.83**
0.81**

1.82
-1.79*
0.96
0.56
0.11
-0.35
-0.41*
-3.79*
1.35
-5.32**
-2.62
-2.66**
1.21
-2.56**
-0.05*
-4.25**
-1.81*
-3.67*
-0.92*
-0.50
-1.26**

0.97
0.82**
0.81**
0.91
0.48**
0.88*
0.74**
0.89*
1.21**
0.45**
-0.85**
0.93*
1.43**
0.86*
0.49**
0.89
0.84**
2.08**
0.84**
0.84**
0.83**

1.81
-1.85*
1.36
0.68
-0.09
0.44
-0.77*
3.25
2.14
-4.62*
-10.37
-2.27*
2.06
-2.85**
0.46
-6.94**
-0.94
-2.46*
-0.44
-0.85
-1.11**

Note: Independent variable is Average Wages. *, **-indicate statistical significance at the 5% and 1%
levels, respectively.

Table 13: Credit Channel Estimation Results: 1993-2011


Country/Dependent Variable
Output
FMOLS
DOLS
Australia
Austria
Belgium
Czech Republic
Denmark
Finland
France
Germany
Iceland
Ireland
Israel
Italy
Korea
Spain
Sweden
Switzerland
United Kingdom
United States
Netherlands
New Zealand
Poland
Portugal
OECD-22

0.01*
0.02*
-0.01*
-0.01*
0.00*
0.01*
0.01*
0.00*
0.00*
0.00*
0.03*
0.00*
0.01*
0.00*
0.00*
0.01*
0.00*
0.01*
0.00*
0.01*
0.02*
0.00*
0.02*

0.01*
0.02*
-0.01*
0.00*
0.00*
0.00*
0.01*
0.00*
0.00*
0.00*
0.03*
0.00*
0.01*
0.00*
0.00*
0.01*
0.00*
0.01*
0.00*
0.01*
0.01*
0.00*
0.02*

FMOLS
0.01*
0.01*
-0.01*
0.23*
0.00*
0.01*
0.00*
-0.04*
0.03*
-0.01*
-0.13*
0.00*
-0.04*
-0.01*
0.01*
-0.02*
0.02*
0.00*
-0.01*
0.02*
-0.26*
-0.01*
-0.01*

Inflation
DOLS
0.00*
-0.04*
-0.01*
0.20*
0.00*
0.00*
-0.02*
-0.01*
0.03*
-0.02*
-0.32*
0.02*
-0.03*
-0.03*
0.00*
-0.02*
0.01*
-0.01*
0.00*
0.01*
-0.17*
-0.02*
-0.02*

Note: Independent variable is Bank-sector Credit. *-indicates statistical significance at the 1%


level.

Table 14: Post-Estimation Test of Transmission Heterogeneity


Channel Dependent
Variable
IMIR
GDP
CPI
STIR
GDP
CPI
LRIR
GDP
CPI
ER
GDP
CPI
M1
GDP
CPI
WG
GDP
CPI
CR
GDP
CPI

FMOLS

DOLS

Chi-Squared
235.43
301.94

P-value
0.00
0.00

Chi-Squared
220.88
288.38

P-value
0.00
0.00

175.15
140.51

0.00
0.00

147.78
135.25

0.00
0.00

284.00
107.00

0.00
0.00

323.36
118.07

0.00
0.00

78.00
133.84

0.00
0.00

78.52
110.88

0.00
0.00

803.74
230.00

0.00
0.00

462.46
48.00

0.00
0.00

436.33
56.08

0.00
0.00

798.29
49.72

0.00
0.00

672.37
61.12

0.00
0.00

1110.81
60.17

0.00
0.00

Note: Null hypothesis is parameter homogeneity. P-values of zero indicate rejection of the
hypothesis of homogeneous monetary response parameters.

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