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A bivariate model of Fed and ECB main policy rates

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  • Chiara Scotti

Abstract

This paper studies when and by how much the Fed and the ECB change their target interest rates. I develop a new nonlinear bivariate framework, which allows for elaborate dynamics and potential interdependence between the two countries, as opposed to linear feedback rules, such as a Taylor rule, and I use a novel real-time data set. A Bayesian estimation approach is particularly well suited to the small data sample. Empirical results support synchronization between the central banks and non-zero correlation between magnitude shocks, but they do not support follower behavior. Institutional factors and inflation represent relevant variables for timing decisions of both banks. Inflation rates are important factors for magnitude decisions, while output plays a major role in US magnitude decisions.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 875.

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Date of creation: 2006
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Handle: RePEc:fip:fedgif:875

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Related research

Keywords: Monetary policy ; Interest rates ; Federal funds rate ; Econometric models;

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References

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Cited by:
  1. Ansgar Belke & Yuhua Cui, 2009. "US–Euro Area Monetary Policy Interdependence – New Evidence from Taylor Rule Based VECMs," Ruhr Economic Papers 0085, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  2. Mandler, Martin, 2010. "Explaining ECB and Fed interest rate correlation: Economic interdependence and optimal monetary policy," MPRA Paper 25929, University Library of Munich, Germany.
  3. Mohamed El Hedi Arouri & Duc Khuong Nguyen & Fredj Jawadi, 2010. "What can we tell about monetary policy synchronization and interdependence over the 2007-2009 global financial crisis?," Working Papers hal-00507826, HAL.
  4. William H. Greene & David A. Hensher, 2008. "Modeling Ordered Choices: A Primer and Recent Developments," Working Papers 08-26, New York University, Leonard N. Stern School of Business, Department of Economics.

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