European Economy. Economic Papers. Germany's growth performance in the 1990's

Figure 2.6:
Monetary Conditions Index for Germany
(Average 1994=0 ; inverted scale)
-4
-2
0
2
4
J a n -9 4
J a n -9 5
J a n -9 6
J a n -9 7
J a n -9 8
J a n -9 9
J a n -0 0
J a n -0 1
The MCI is constructed as a
weighted average of changes
in short-term interest rates
and the effective exchange
rate. The weights are
intended to represent the
relative impact of interest
rates and exchange rates on
aggregate demand. They
should be regarded as
indicative rather than precise
estimates. Movements in the
index are equivalent to
percentage point changes in
real interest rates. No
meaning is to be attached to
the absolute value of the
index; rather the index is
intended to show the degree
of tightening or easing in the MCI from the (arbitrarily chosen) base period.
The calculation of MCIs has led to the same mixed results as Taylor rates. Again the
Bundesbank has subscribed to a more sceptical view, while others, most notably private banks,
use MCIs as a standard tool of economic analysis. The Commission services use MCIs as a
supplementary device in analysis. The results obtained by the MCI suggest a tightening stance
in Germany since the mid-1990s and a marked easing in the most recent period (Figure 2.6).
Looking at the components of the MCI a marked easing in 1999/2000 can be identified, which
can be attributed to a fall in the short-term real interest rate (Figure 2.7). In 1994-95 and towards
the end of 1997 the interest-rate induced easing was obscured by a real depreciation of the
DEM. By contrast, in 1999 the decline in the external value of the euro came along with a
decline in the real interest rate resulting in an easing of monetary conditions. The significant
effects on the German real effective exchange rate and the contribution to the MCI indicate the
great importance of USD denominated foreign trade for the German economy. This view is
supported by the relatively small contribution of the real interest rate.