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How the ECB and the US Fed set interest rates

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  • Ansgar Belke
  • Thorsten Polleit

Abstract

Monetary policies of the European Central Bank (ECB) and US Fed can be characterized by 'Taylor rules', that is both central banks seem to be setting rates by taking into account the 'output gap' and inflation. We also set up and tested Taylor rules which incorporate money growth and the euro-dollar exchange rate, thereby improving the 'fit' between actual and Taylor rule based rates. In general, Taylor rules appear to be a much better way of describing Fed policy than ECB policy. Simulations suggest that the ECB's short-term interest rates have been at a much lower level in the last 2 years compared with what a Taylor rule would suggest.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 39 (2007)
Issue (Month): 17 ()
Pages: 2197-2209

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Handle: RePEc:taf:applec:v:39:y:2007:i:17:p:2197-2209

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