Monetary policy independence reconsidered: evidence from six non-euro members of the European Union

This study measures the degree of de-facto monetary policy independence of a national central bank. This measurement might allow a central bank to assess the gains and losses in sovereign affecting the national money market when the country's own currency is given up and a common one is adopted. The study applies a multivariate GARCH model to the money market rates of six members of the European Union that have not adopted the common currency. It finds that the central banks of Sweden, Romania, and Poland would not lose considerable de-facto independence by adopting the euro. Their daily money market rates co-move strongly with the euro money market rates, which is a sign of already low monetary policy independence despite floating exchange rates. This result confirms other research with co-integration techniques, although the coefficients of co-movement with the euro money market are lower in the present study. Lower coefficients can be explained by the impact of non-mean reverting money market rates after heavy shocks in turbulent market periods, which slacken the co-movement ties. The opposite results were obtained for the central banks of the UK, the Czech Republic and Hungary. Hungary is a problematic case: notwithstanding a low co-movement of money market rates with the euro market rates, the almost explosive volatility of money market rates after a shock signals a very poor effectiveness of monetary policy.