Monetary transmission mechanisms in Spain: The effect of monetization, financial deregulation, and the EMS

The paper presents a cointegrated VAR analysis of monetary transmission mechanisms and changes in them after Spain joined the EMS in 1989. Analyses of long-run price homogeneity within the I(2) model turned out to be crucial for understanding the joint behavior of money, income, and prices. The empirical findings point to real monetization effects in the pre-EMS period and the crucial role of shocks to nominal interest rates, in particular to the long-term bond rate. In addition, the paper provides further insights on the macroeconomic effects of joining the EMS and financial deregulation. The increased economic integration within the EU is shown to have fundamentally changed the dynamics of the conventional IS-LM transmission mechanism and led to decreased effectiveness of monetary policy.