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The Fed and the ECB: why such an apparent difference in reactivity?

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Author Info

  • Alexis Penot
  • Grégory Levieuge

Abstract

Purpose – The purpose of this paper is to try to understand the reasons for the differences in amplitude of monetary policy (MP) rate cycles in the USA and the euro area. Among the different candidates, the paper aims to test the role of economic structures, macroeconomic shocks, and MP behaviour. Design/methodology/approach – The paper starts by estimating value at risk models both for the USA and the euro area to identify the economic structures, the MP rules, and the macroeconomics shocks of both areas. Then, it runs counterfactual simulations (by injecting European Central Bank's (ECB) monetary rule in the US model for example) to examine which factors had the most significant impact on differences in MP activism (measured by the variance of interest rates). Findings – The paper finds that differences implied by MP rules alone cannot explain the dissimilarity of interest rates paths. In the same way, while cyclical shocks are different in each area, they do not suffice to explain the factual divergences. Finally, it is the structural dissimilarities which essentially explain the difference in interest rate variances. Originality/value – The paper brings new informations on a controversial issue and it tends to reject the official explanations given by ECB's governor who points out differences in shocks.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Journal of Financial Economic Policy.

Volume (Year): 1 (2009)
Issue (Month): 4 (May)
Pages: 319-337

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Handle: RePEc:eme:jfeppp:v:1:y:2009:i:4:p:319-337

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Related research

Keywords: Europe; Monetary policy; United States of America;

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References

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  1. Ball, Laurence, 1999. "Efficient Rules for Monetary Policy," International Finance, Wiley Blackwell, vol. 2(1), pages 63-83, April.
  2. Smets, Frank & Wouters, Raf, 2004. "Comparing shocks and frictions in US and euro area business cycles: a Bayesian DSGE approach," Working Paper Series 0391, European Central Bank.
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  15. Horst Siebert, 1997. "Labor Market Rigidities: At the Root of Unemployment in Europe," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 37-54, Summer.
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Citations

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Cited by:
  1. Emmanuel Dubois & Jerome Hericourt & Valerie Mignon, 2009. "What if the euro had never been launched? A counterfactual analysis of the macroeconomic impact of euro membership," Economics Bulletin, AccessEcon, vol. 29(3), pages 2241-2255.
  2. Cécile Bastidon, 2013. "Un modèle théorique d'intermédiation : transmission et gestion des chocs," Post-Print hal-00806524, HAL.

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