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Was ECB's monetary policy optimal?

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  • Fritz Breuss

Abstract

Overall, the ECB managed monetary policy quite satisfactorily in the first phase of EMU. Nevertheless, this paper asks whether monetary policy could not have been improved. In the last three years, Euroland was confronted with the first external shock. Oil prices increased considerably, leading to an increase of headline inflation of over one percentage point in 2000–01. With a specific Taylor rule one can very well understand, how the ECB sets interest rates, but it turns out that monetary policy based on the estimated Taylor reaction function was rather backward than forward looking. While it reacted with a lag to the actions of the U.S. Fed, it was overly cautious by targeting total HICP inflation. Here it is strongly argued and also demonstrated with model simulations that a monetary policy oriented towards core inflation would have resulted in a much better economic performance. The business cycle downturn could have been mitigated with no additional inflation risks. Copyright International Atlantic Economic Society 2002

Suggested Citation

  • Fritz Breuss, 2002. "Was ECB's monetary policy optimal?," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 30(3), pages 298-319, September.
    • Handle: RePEc:kap:atlecj:v:30:y:2002:i:3:p:298-319
    DOI: 10.1007/BF02298427
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    Cited by:

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    2. Helene Schuberth, 2004. "Ziele der Geldpolitik - Die Rolle von Konjunkturstabilisierung," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 30(2), pages 177-195.
    3. Martin Mandler, 2010. "Explaining ECB and FED interest rate correlation: Economic interdependence and optimal monetary policy," MAGKS Papers on Economics 201025, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    4. Friedrich Heinemann & Katrin Ullrich, 2007. "Does it Pay to Watch Central Bankers’ Lips? The Information Content of ECB Wording," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 143(II), pages 155-185, June.
    5. VAN POECK, André, 2009. "One money and fifteen needs inflation and output convergence in the European Monetary Union," Working Papers 2009001, University of Antwerp, Faculty of Business and Economics.
    6. Gerlach, Stefan, 2004. "Interest Rate Setting by the ECB: Words and Deeds," CEPR Discussion Papers 4775, C.E.P.R. Discussion Papers.
    7. Andrea Monticini & Giacomo Vaciago, 2007. "Are Euro Interest Rates led by FED Announcements?," Money Macro and Finance (MMF) Research Group Conference 2006 16, Money Macro and Finance Research Group.

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