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Optimal regional biases in ECB interest rate setting

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  • Arnold, Ivo J.M.

Abstract

This paper uses a simple model of optimal monetary policy to consider whether the influence of national output and inflation rates on ECB interest rate setting should equal a country’s weight in the eurozone economy. The findings depend on assumptions regarding interest rate elasticities, exchange rate elasticities, and openness vis-à-vis non-eurozone countries. The major conclusion is that the ECB should respond less to inflation shocks in EMU countries that have strong trading ties with non-eurozone countries. Intuitively, these countries can take care of some of the monetary tightening themselves, through a real appreciation vis-à-vis their non-eurozone trading partners.

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Bibliographic Info

Article provided by Elsevier in its journal European Journal of Political Economy.

Volume (Year): 22 (2006)
Issue (Month): 2 (June)
Pages: 307-321

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Handle: RePEc:eee:poleco:v:22:y:2006:i:2:p:307-321

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Web page: http://www.elsevier.com/locate/inca/505544

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References

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  1. Helge Berger & Jakob de Haan & Robert Inklaar, 2003. "Restructuring the ECB," CESifo Working Paper Series 1084, CESifo Group Munich.
  2. Helge Berger & Jakob Haan, 2002. "Are small countries too powerful within the ECB?," Atlantic Economic Journal, International Atlantic Economic Society, International Atlantic Economic Society, vol. 30(3), pages 263-282, September.
  3. Ivo Arnold & Bastiaan Verhoef, 2004. "External causes of Euro zone inflation differentials," Intereconomics: Review of European Economic Policy, Springer, Springer, vol. 39(5), pages 254-263, September.
  4. Taylor, John B., 1999. "The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European central bank," Journal of Monetary Economics, Elsevier, Elsevier, vol. 43(3), pages 655-679, June.
  5. Alessandra Casella, 1990. "Participation in a Currency Union," NBER Working Papers 3220, National Bureau of Economic Research, Inc.
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  8. Helge Berger & Till Mueller, 2007. "How should large and small countries be represented in a currency union?," Public Choice, Springer, Springer, vol. 132(3), pages 471-484, September.
  9. C.J.M. Kool, 2005. "What Drives ECB Monetary Policy?," Working Papers, Utrecht School of Economics 05-03, Utrecht School of Economics.
  10. Gerlach, Stefan & Schnabel, Gert, 2000. "The Taylor rule and interest rates in the EMU area," Economics Letters, Elsevier, Elsevier, vol. 67(2), pages 165-171, May.
  11. Peersman, Gert & Smets, Frank, 1999. "The Taylor Rule: A Useful Monetary Policy Benchmark for the Euro Area?," International Finance, Wiley Blackwell, Wiley Blackwell, vol. 2(1), pages 85-116, April.
  12. Ellen E. Meade & D. Nathan Sheets, 2002. "Regional influences on U.S. monetary policy: some implications for Europe," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 20091, London School of Economics and Political Science, LSE Library.
  13. Stephan Sauer & Jan-Egbert Sturm, 2003. "Using Taylor Rules to Understand ECB Monetary Policy," CESifo Working Paper Series 1110, CESifo Group Munich.
  14. Huefner, Felix P & Friedrich Heinemann, 2003. "Is the View from the Eurotower Purely European? - National Divergence and ECB Interest Rate Policy," Royal Economic Society Annual Conference 2003, Royal Economic Society 110, Royal Economic Society.
  15. Laurence Ball, 1999. "Aggregate demand and Long-Run Unemployment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(2), pages 189-252.
  16. von Hagen, Jürgen & Brückner, Matthias, 2001. "Monetary policy in unknown territory: The European Central Bank in the early years," ZEI Working Papers B 18-2001, ZEI - Center for European Integration Studies, University of Bonn.
  17. Fourcans, Andre & Vranceanu, Radu, 2004. "The ECB interest rate rule under the Duisenberg presidency," European Journal of Political Economy, Elsevier, Elsevier, vol. 20(3), pages 579-595, September.
  18. Jon Faust & John H. Rogers & Jonathan H. Wright, 2001. "An empirical comparison of Bundesbank and ECB monetary policy rules," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 705, Board of Governors of the Federal Reserve System (U.S.).
  19. Ellen E. Meade & D. Nathan Sheets, 2002. "Regional influences on U.S. monetary policy: some implications for Europe," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 721, Board of Governors of the Federal Reserve System (U.S.).
  20. I. Arnold & C.J.M. Kool, 2004. "The Role of Inflation Differentials in Regional Adjustment: Evidence from the United States," Working Papers, Utrecht School of Economics 04-13, Utrecht School of Economics.
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  22. Taylor, J.B., 1998. "The Robustness and Efficiency of Monetary Policy Rules as Guidelines for Interest Rate Setting by European Central Bank," Papers, Stockholm - International Economic Studies 649, Stockholm - International Economic Studies.
  23. Bergvall, Anders, 2002. "The Stabilizing Properties of Floating Exchange Rates: Some International Evidence," Working Paper Series, Uppsala University, Department of Economics 2002:14, Uppsala University, Department of Economics.
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Cited by:
  1. C.J.M. Kool, 2005. "What Drives ECB Monetary Policy?," Working Papers, Utrecht School of Economics 05-03, Utrecht School of Economics.
  2. Neuenkirch, Matthias & Siklos, Pierre L., 2013. "What's in a second opinion? Shadowing the ECB and the Bank of England," European Journal of Political Economy, Elsevier, Elsevier, vol. 32(C), pages 135-148.
  3. Bernd Hayo & Pierre-Guillaume Méon, 2013. "Behind closed doors: Revealing the ECB’s decision rule," ULB Institutional Repository 2013/163529, ULB -- Universite Libre de Bruxelles.
  4. Frey, Rainer, 2009. "The design of an asymmetric currency union with shock persistence and spillovers: Short-term versus medium-term," European Journal of Political Economy, Elsevier, Elsevier, vol. 25(1), pages 85-97, March.

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