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National information and euro area monetary policy: a generalized ordered choice approach

Author

Listed:
  • Christina Bräuning

    (De Nederlandsche Bank)

  • Ralf Fendel

    (WHU - Otto Beisheim School of Management)

Abstract

We empirically analyze the influence of inflationary pressure originating from persistent national misalignments on the ECB’s interest rate decisions between 2000 and mid-2010. To do so, we introduce an indicator that summarizes the threat to euro area price stability originating from self-reinforcing expected inflation differentials. The indicator is computed based on persistent deviations of national expected inflation and GDP growth rates from the corresponding euro area aggregate. It thereby captures area-wide excess demand pressure on the euro area inflation rate. In order to determine the information content of this indicator, we add it to an empirical monetary policy reaction function. We then analyze this reaction function in the framework of a generalized ordered choice model that fits the data a lot better than its commonly used, more restricted counterpart. Within this empirical framework, we find that after controlling for several area-wide aggregates, national information does not provide additional information that is indicative of the ECB’s policy rate decision.

Suggested Citation

  • Christina Bräuning & Ralf Fendel, 2018. "National information and euro area monetary policy: a generalized ordered choice approach," Empirical Economics, Springer, vol. 54(2), pages 501-522, March.
    • Handle: RePEc:spr:empeco:v:54:y:2018:i:2:d:10.1007_s00181-017-1238-1
    DOI: 10.1007/s00181-017-1238-1
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    2. Li, Zheng & Hensher, David A., 2020. "Performance contributors of bus rapid transit systems: An ordered choice approach," Economic Analysis and Policy, Elsevier, vol. 67(C), pages 154-161.

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    More about this item

    Keywords

    Central banking; National information; Discrete regression; Inflation differentials;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities

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