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Explaining ECB and FED interest rate correlation: Economic interdependence and optimal monetary policy

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  • Martin Mandler

    (University of Giessen)

Abstract

This paper studies whether the observed high correlation between monetary policy in the U.S. and the Euro area can be explained by economic fundamentals, i.e. by macroeconomic interdependence between the two regions. We show that an optimal monetary policy reaction function for the ECB that accounts explicitly for economic interrelationships between the two economies reproduces substantial parts of the observed patterns of interest rate correlation and represents a good approximation to the actually observed monetary policy of the ECB. It implies strong reactions to shocks to US variables, particularly to shocks to the Federal Funds Rate.

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File URL: http://www.uni-marburg.de/fb02/makro/forschung/magkspapers/25-2010_mandler.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) in its series MAGKS Papers on Economics with number 201025.

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Length: 46 pages
Date of creation: 2010
Date of revision:
Publication status: Forthcoming in
Handle: RePEc:mar:magkse:201025

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Keywords: optimal monetary policy; monetary policy reaction function; vector autoregressions;

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References

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Cited by:
  1. Georg Dettmann, 2014. "Determinants of Internal and External Imbalances within the Euro Area," Working Papers 01/2014, University of Verona, Department of Economics.

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