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The Fed and the ECB: Why such an apparent difference in reactivity?

  • Grégory Levieuge

    ()

    (Laboratoire d'Economie d'Orléans (LEO), UMR CNRS 6221)

  • Alexis Penot

    ()

    (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France,)

Compared with the U.S., the amplitude of the European monetary policy rate cycle is strikingly narrow. Is it an evidence of a less reactive ECB? This observation can certainly reflect the preferences and then the strategy of the ECB. But its greater inertia must also be assessed in the light of the singularity of the European structure and of the shocks hitting it. From this perspective, several contributions assert that the nature, size and persistence of shocks mainly explain the different interest rate setting. Therefore, they rely on the idea that both areas share the same monetary policy rule and, more surprising, the same structure. This paper aims at examining this conclusions with an alternative modelling. The results confirm that the euro area and U.S. monetary policy rules are not fundamentally different. But we reject the differences of nature and amplitude of shocks. What is often interpreted as such is in fact the consequence of how distinctly both economies absorb shocks. So differences in the amplitude of the interest rate cycles in both areas are basically explained by structural dissimilarities.

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Paper provided by Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure in its series Working Papers with number 0804.

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Length: 38 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:gat:wpaper:0804
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