Optimal regional biases in ECB interest rate setting

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Optimal regional biases in ECB interest rate setting

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Ivo J.M. Arnold (Nyenrode Business Universiteit)

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Ivo Arnold

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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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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Article
- Arnold, Ivo J.M., 2006. "Optimal regional biases in ECB interest rate setting," European Journal of Political Economy, Elsevier, vol. 22(2), pages 307-321, June. [Downloadable!] (restricted)

This paper has been announced in the following NEP Reports:

NEP-ALL-2006-05-27 (All new papers)
NEP-CBA-2006-05-27 (Central Banking)
NEP-EEC-2006-05-27 (European Economics)
NEP-FMK-2006-05-27 (Financial Markets)
NEP-MAC-2006-05-27 (Macroeconomics)
NEP-MON-2006-05-27 (Monetary Economics)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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Clemens J.M. Kool, 2005. "What Drives ECB Monetary Policy?," Working Papers 05-03, Utrecht School of Economics. [Downloadable!]

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