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Asymmetries in the Trans-Atlantic Monetary Policy Relationship: Does the ECB follow the Fed?

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  • Ansgar Belke
  • Daniel Gros

Abstract

The belief that the ECB follows the US Federal Reserve in setting its policy is so entrenched with market participants and commentators that the search for empirical support would seem to be a trivial task. However, this is not the case. We find that the ECB is indeed often influenced by the Fed, but the reverse is true at least as often if one considers longer sample periods. There is empirically little support for the proposition that there has been for a long time a systematic asymmetric leader-follower relationship between the ECB and the Fed. Only after September 2001 is there more evidence of such an asymmetry. We also find a clear-cut structural break between the pre-EMU and the EMU period in terms of the relationship between short term interest rates on both sides of the Atlantic.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1428.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1428

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Keywords: co-movement of interest rates; European Central Bank; Federal Reserve; monetary policy; policy coordination;

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  1. Ansgar Belke, 2002. "Does the ECB Follow the FED?," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 211/2002, Department of Economics, University of Hohenheim, Germany.
  2. James D. Hamilton & Oscar Jorda, . "A model for the federal funds rate target," Department of Economics 99-07, California Davis - Department of Economics.
  3. Fritz Breuss, 2002. "Was ECB's Monetary Policy Optimal?," WIFO Working Papers 173, WIFO.
  4. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  5. Hagen, Jurgen von & Fratianni, Michele, 1990. "German dominance in the EMS: evidence from interest rates," Journal of International Money and Finance, Elsevier, vol. 9(4), pages 358-375, December.
  6. Amado Peiró, 2002. "Macroeconomic Synchronization Between G3 Countries," German Economic Review, Verein für Socialpolitik, vol. 3(2), pages 137-153, 05.
  7. Ehrmann, Michael & Fratzscher, Marcel, 2002. "Interdependence between the euro area and the US: what role for EMU?," Working Paper Series 0200, European Central Bank.
  8. Ullrich, Katrin, 2003. "A Comparison Between the Fed and the ECB: Taylor Rules," ZEW Discussion Papers 03-19, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  9. Fischer, Andreas M & Peytrignet, Michel, 1991. "The Lucas Critique in Light of Swiss Monetary Policy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 53(4), pages 481-93, November.
  10. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, Octomber.
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