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The Monetary Policy of the ECB: Caring for the Weakest Links

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  • Marcus Drometer
  • Thomas Siemsen
  • Sebastian Watzka

Abstract

This paper investigates the extent to which national economic conditions matter in the ECB's decision process. We employ various decision models to aggregate counterfactual national interest rates based on Taylor rule estimates and test which of the resulting interest paths fits best to the actual monetary policy in the euro area. As a novel feature, we introduce decision models where countries that fare economically worse than the euro area average obtain a higher weight in the decision process. Our results suggest that these models explain actual ECB policy better than GDP‐based bargaining models that have been highlighted in the previous literature. Thus, the ECB seems to have emphasized the needs of countries that face an economic crisis disproportionately highly even before the advent of the financial crisis.

Suggested Citation

  • Marcus Drometer & Thomas Siemsen & Sebastian Watzka, 2018. "The Monetary Policy of the ECB: Caring for the Weakest Links," Kyklos, Wiley Blackwell, vol. 71(4), pages 537-556, November.
  • Handle: RePEc:bla:kyklos:v:71:y:2018:i:4:p:537-556
    DOI: 10.1111/kykl.12185
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