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Behind closed doors: Revealing the ECB's decision rule

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  • Hayo, Bernd
  • Méon, Pierre-Guillaume

Abstract

This paper aims at discovering the decision rule the Governing Council of the ECB uses to set interest rates. We construct a Taylor rule for each member of the council and for the euro area as a whole, and aggregate the interest rates they produce using several classes of decision-making mechanisms: chairman dominance, bargaining, consensus, voting, and voting with a chairman. We test alternative scenarios in which individual members of the council pursue either a national or a federal objective. We then compare the interest-rate path predicted by each scenario with the observed euro area's interest rate. We find that scenarios in which all members of the Governing Council are assumed to pursue Euro-area-wide objectives are dominated by scenarios in which decisions are made collectively by a council consisting of members pursuing national objectives. The best-performing scenario is the one in which individual members of the Governing Council follow national objectives, bargain over the interest rate, and their weights are based on their country's share of the zone's GDP.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 37 (2013)
Issue (Month): C ()
Pages: 135-160

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Handle: RePEc:eee:jimfin:v:37:y:2013:i:c:p:135-160

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: European Central Bank; Monetary policy committee; Decision rules;

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. The Italian Job – How Passports Influence Monetary Policy Decisions
    by Olaf Storbeck in Economics Intelligence on 2011-11-01 14:47:39
  2. â??The Italian Jobâ? â?? Die EZB und ihre Lebenslüge
    by Olaf Storbeck in Handelsblog on 2011-11-01 10:20:39
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Cited by:
  1. Badinger, Harald & Nitsch, Volker, 2014. "National representation in supranational institutions: The case of the European Central Bank," Journal of Comparative Economics, Elsevier, vol. 42(1), pages 19-33.
  2. Bernd Hayo & Matthias Neuenkirch, 2014. "Central Bank Communication in the Financial Crisis: Evidence from a Survey of Financial Market Participants," Research Papers in Economics 2014-01, University of Trier, Department of Economics.
  3. Bernd Hayo & Pierre-Guillaume Méon, 2012. "Why Countries Matter for Monetary Policy Decision-Making in the ESCB," ULB Institutional Repository 2013/130369, ULB -- Universite Libre de Bruxelles.
  4. Jürgen Stark & Alexander Jung & Francesco Paolo Mongelli, 2012. "Normal Times versus Crisis Times," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 10(1), pages 03-09, 04.
  5. Harald Badinger & Volker Nitsch, 2012. "Supranationalism in Monetary Policy Decision-Making," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 10(1), pages 27-31, 04.
  6. Bernd Hayo & Florian Neumeier & Matthias Uhl, 2014. "Topics in Fiscal Policy: Evidence from a Representative Survey of the German Population," MAGKS Papers on Economics 201412, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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