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Evaluating the stresses from ECB monetary policy in the euro area

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Author Info
Lee , Jim (Texas A&M University- Corpus Christi)
Crowley, Patrick M () (Texas A&M University - Corpus Christi)

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Abstract

This paper investigates the extent to which euro area monetary policy has responded to evolving economic conditions in individual member states as opposed to the euro area as a whole. Based on a forward-looking Taylor rule-type policy reaction function, we conduct counterfactual exercises that compare the monetary policy behaviour of the ECB under alternative hypothetical scenarios: (1) the euro member states make individual policy decisions, and (2) the ECB responds to the economic conditions of individual members. Stress measures are then constructed to evaluate the degree of divergence of member state economies under these two hypothetical scenarios. The results we obtain reflect the extent of heterogeneity among the national economies in the monetary union, indicating that euro area policy rates have been particularly close to the ‘counterfactual’ interest rates of the largest euro members and countries with similar economic conditions, namely Germany, Austria, Belgium and France.

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Publisher Info
Paper provided by Bank of Finland in its series Research Discussion Papers with number 11/2009.

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Length: 35 pages
Date of creation: 07 Apr 2009
Date of revision:
Handle: RePEc:hhs:bofrdp:2009_011

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
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Related research
Keywords: European Central Bank; monetary policy reaction; Taylor rule; counterfactual analysis;

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Find related papers by JEL classification:
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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  3. Philip Arestis & Georgios Chortareas, 2006. "Monetary policy in the euro area," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 28(3), pages 371-394, April. [Downloadable!] (restricted)
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  12. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June. [Downloadable!] (restricted)
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  13. Robert G. King & James H. Stock & Mark W. Watson, 1995. "Temporal instability of the unemployment-inflation relationship," Economic Perspectives, Federal Reserve Bank of Chicago, issue May, pages 2-12. [Downloadable!]
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