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

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  • Mandler, Martin

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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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 25929.

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Date of creation: Oct 2010
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Handle: RePEc:pra:mprapa:25929

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

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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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