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Monetary Policy Stress in EMU: What Role for Fundamentals and Missed Forecasts?

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  • Paweł Gajewski

Abstract

This article reexamines the problem of monetary policy stress in the EMU. In addition to estimating the amount of stress in particular countries, we investigate its sources by breaking it down into its “fundamental” parts, covering how it is a result of country-specific macroeconomic divergences and the EMU-wide “non-fundamental” component, with special attention given to the role of missed forecasts. Our results confirm that peripheral countries were exposed to risks emerging from low interest rates while the “core” countries did not suffer from much monetary policy stress. Interestingly, the bulk of it was non-fundamental, i.e., not caused by inflation and output gap differentials between countries. We show that missed forecasts did make an important contribution to this part of the stress and were mainly responsible for pushing the interest rate below its rule-consistent level.

Suggested Citation

  • Paweł Gajewski, 2016. "Monetary Policy Stress in EMU: What Role for Fundamentals and Missed Forecasts?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(5), pages 1226-1240, May.
    • Handle: RePEc:mes:emfitr:v:52:y:2016:i:5:p:1226-1240
    DOI: 10.1080/1540496X.2015.1037204
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    Cited by:

    1. Hasan Engin Duran & Pawe³ Gajewski, 2023. "State-level Taylor rule and monetary policy stress," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 18(1), pages 89-120, March.
    2. Gajewski Pawe³, 2018. "Demand and Supply Shock Symmetry across Polish Voievodships," Lodz Economics Working Papers 5/2018, University of Lodz, Faculty of Economics and Sociology.
    3. Maciej Ryczkowski, 2016. "Poland as an inflation nutter:The story of successful output stabilization," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 34(2), pages 363-392.

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