A Bivariate Model of Federal Reserve and ECB Main Policy Rates
This paper studies when and by how much the Federal Reserve and the European Central Bank change their target interest rates. I develop a new non-linear bivariate framework, which allows for elaborate dynamics and potential interdependence between the two countries, as opposed to linear feedback rules, such as a Taylor rule, and I use a novel real-time data set. Although the data sample is inherently small, through a Bayesian estimation approach, I find some evidence in favor of timing synchronization between central banks and against the hypothesis of follower behaviors. Results for the magnitude model support zero correlation in the size of the target rate changes. Institutional factors and inflation represent relevant variables for both timing and magnitude decisions, while output plays a secondary role.
References listed on IDEAS
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- Leonardo Bartolini & Alessandro Prati, 2003.
"The execution of monetary policy: a tale of two central banks,"
CEPR;CES;MSH, vol. 18(37), pages 435-467, October.
- Leonardo Bartolini & Alessandro Prati, 2003. "The execution of monetary policy: a tale of two central banks," Staff Reports 165, Federal Reserve Bank of New York.
- Bauwens, Luc & Lubrano, Michel & Richard, Jean-Francois, 2000. "Bayesian Inference in Dynamic Econometric Models," OUP Catalogue, Oxford University Press, number 9780198773139, March.
- Molodtsova, Tanya & Nikolsko-Rzhevskyy, Alex & Papell, David H., 2008. "Taylor rules with real-time data: A tale of two countries and one exchange rate," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages S63-S79, October.
- Benigno, Pierpaolo, 2002. "A simple approach to international monetary policy coordination," Journal of International Economics, Elsevier, vol. 57(1), pages 177-196, June.
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