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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)

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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Bibliographic 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

Contact details of provider:
Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Keywords: European Central Bank; monetary policy reaction; Taylor rule; counterfactual analysis;

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References

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  1. Muscatelli, V Anton & Tirelli, Patrizio & Trecroci, Carmine, 2002. "Does Institutional Change Really Matter? Inflation Targets, Central Bank Reform and Interest Rate Policy in the OECD Countries," Manchester School, University of Manchester, vol. 70(4), pages 487-527, Special I.
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  13. Kai Carstensen, 2006. "Estimating the ECB Policy Reaction Function," German Economic Review, Verein für Socialpolitik, vol. 7, pages 1-34, 02.
  14. Assenmacher-Wesche, Katrin & Gerlach, Stefan, 2006. "Money at Low Frequencies," CEPR Discussion Papers 5868, C.E.P.R. Discussion Papers.
  15. 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.
  16. John P. Judd & Glenn D. Rudebusch, 1998. "Taylor's rule and the Fed, 1970-1997," Economic Review, Federal Reserve Bank of San Francisco, pages 3-16.
  17. 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.
  18. Mehrotra, Aaron, 2007. "A note on the national contributions to euro area M3," Research Discussion Papers 2/2007, Bank of Finland.
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Cited by:
  1. Cancelo, José Ramón & Varela, Diego & Sánchez-Santos, José Manuel, 2011. "Interest rate setting at the ECB: Individual preferences and collective decision making," Journal of Policy Modeling, Elsevier, vol. 33(6), pages 804-820.
  2. Lee, Jim, 2009. "Evaluating monetary policy of the euro area with cross-country heterogeneity: Evidence from a New Keynesian model," Economic Systems, Elsevier, vol. 33(4), pages 325-343, December.
  3. Landais, Bernard, 2011. "Conduite et efficacité de la politique économique : les leçons de la crise
    [Management and Efficiency of the Economic Policies : The Crisis' Lessons"]
    ," MPRA Paper 31223, University Library of Munich, Germany.

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