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Optimal regional biases in ECB interest rate setting

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  • Ivo J.M. Arnold

    (Nyenrode Business Universiteit)

Abstract

This paper uses a simple model of optimal monetary policy to consider whether the influence of national output and inflation rates on ECB interest rate setting should equal a country’s weight in the eurozone economy. The findings depend on assumptions regarding interest rate elasticities, exchange rate elasticities, and openness vis-à-vis non-eurozone countries. The major conclusion is that the ECB should respond less to inflation shocks in EMU countries that have strong trading ties with non-eurozone countries. Intuitively, these countries can take care of some of the monetary tightening themselves, through a real appreciation vis-à-vis their non-eurozone trading partners.

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Bibliographic Info

Paper provided by Nyenrode Business Universiteit in its series Nyenrode Research Papers Series with number 05-01.

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Date of creation: 2005
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Handle: RePEc:dgr:nijrep:2005-01

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Web page: http://www.library.nyenrode.nl

Related research

Keywords: EMU; Taylor rule; Optimal monetary poli;

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References

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  1. Heinemann, Friedrich & Huefner, Felix P., 2002. "Is the View from the Eurotower Purely European? National Divergence and ECB Interest Rate Policy," ZEW Discussion Papers 02-69, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. von Hagen, Jürgen & Brückner, Matthias, 2001. "Monetary policy in unknown territory: The European Central Bank in the early years," ZEI Working Papers B 18-2001, ZEI - Center for European Integration Studies, University of Bonn.
  3. Svensson, Lars E.O., 1997. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Seminar Papers 615, Stockholm University, Institute for International Economic Studies.
  4. Jon Faust & John H. Rogers & Jonathan H. Wright, 2001. "An empirical comparison of Bundesbank and ECB monetary policy rules," International Finance Discussion Papers 705, Board of Governors of the Federal Reserve System (U.S.).
  5. Ivo Arnold & Bastiaan Verhoef, 2004. "External causes of Euro zone inflation differentials," Intereconomics: Review of European Economic Policy, Springer, vol. 39(5), pages 254-263, September.
  6. Patrick Honohan & Philip R. Lane, 2003. "Divergent inflation rates in EMU," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 357-394, October.
  7. Helge Berger & Till Mueller, 2007. "How should large and small countries be represented in a currency union?," Public Choice, Springer, vol. 132(3), pages 471-484, September.
  8. Taylor, J.B., 1998. "The Robustness and Efficiency of Monetary Policy Rules as Guidelines for Interest Rate Setting by European Central Bank," Papers 649, Stockholm - International Economic Studies.
  9. Taylor, John B., 1998. "The Robustness and Efficiency of Monetary Policy Rules as Guidelines for Interest Rate Setting by the European Central Bank," Seminar Papers 649, Stockholm University, Institute for International Economic Studies.
  10. Peersman, Gert & Smets, Frank, 1999. "The Taylor Rule: A Useful Monetary Policy Benchmark for the Euro Area?," International Finance, Wiley Blackwell, vol. 2(1), pages 85-116, April.
  11. Hayo, Bernd & Hofmann, Boris, 2003. "Monetary policy reaction functions: ECB versus Bundesbank," ZEI Working Papers B 24-2003, ZEI - Center for European Integration Studies, University of Bonn.
  12. Stephan Sauer & Jan-Egbert Sturm, 2003. "Using Taylor Rules to Understand ECB Monetary Policy," CESifo Working Paper Series 1110, CESifo Group Munich.
  13. Fourcans, Andre & Vranceanu, Radu, 2004. "The ECB interest rate rule under the Duisenberg presidency," European Journal of Political Economy, Elsevier, vol. 20(3), pages 579-595, September.
  14. Gerlach, Stefan & Schnabel, Gert, 2000. "The Taylor rule and interest rates in the EMU area," Economics Letters, Elsevier, vol. 67(2), pages 165-171, May.
  15. Casella, Alessandra, 1992. "Participation in a Currency Union," American Economic Review, American Economic Association, vol. 82(4), pages 847-63, September.
  16. C.J.M. Kool, 2005. "What Drives ECB Monetary Policy?," Working Papers 05-03, Utrecht School of Economics.
  17. Helge Berger & Jakob Haan, 2002. "Are small countries too powerful within the ECB?," Atlantic Economic Journal, International Atlantic Economic Society, vol. 30(3), pages 263-282, September.
  18. Ellen E. Meade & D. Nathan Sheets, 2002. "Regional Influences on U.S. Monetary Policy: Some Implications for Europe," CEP Discussion Papers dp0523, Centre for Economic Performance, LSE.
  19. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  20. Helge Berger & Jakob de Haan & Robert Inklaar, 2003. "Restructuring the ECB," CESifo Working Paper Series 1084, CESifo Group Munich.
  21. I. Arnold & C.J.M. Kool, 2004. "The Role of Inflation Differentials in Regional Adjustment: Evidence from the United States," Working Papers 04-13, Utrecht School of Economics.
  22. Ellen E. Meade & D. Nathan Sheets, 2002. "Regional influences on U.S. monetary policy: some implications for Europe," LSE Research Online Documents on Economics 20091, London School of Economics and Political Science, LSE Library.
  23. Bergvall, Anders, 2002. "The Stabilizing Properties of Floating Exchange Rates: Some International Evidence," Working Paper Series 2002:14, Uppsala University, Department of Economics.
  24. Laurence Ball, 1999. "Aggregate demand and Long-Run Unemployment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(2), pages 189-252.
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Citations

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Cited by:
  1. Matthias Neuenkirch & Pierre L. Siklos, 2013. "What's in a Second Opinion? Shadowing the ECB and the Bank of England," CAMA Working Papers 2013-46, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Bernd Hayo & Pierre-Guillaume Méon, 2013. "Behind closed doors: Revealing the ECB’s decision rule," ULB Institutional Repository 2013/163529, ULB -- Universite Libre de Bruxelles.
  3. Frey, Rainer, 2009. "The design of an asymmetric currency union with shock persistence and spillovers: Short-term versus medium-term," European Journal of Political Economy, Elsevier, vol. 25(1), pages 85-97, March.
  4. C.J.M. Kool, 2005. "What Drives ECB Monetary Policy?," Working Papers 05-03, Utrecht School of Economics.

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