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Evaluating the stresses from ECB monetary policy in the euro area

  • Lee , Jim

    (Texas A&M University- Corpus Christi)

  • Crowley, Patrick M

    ()

    (Texas A&M University - Corpus Christi)

This paper investigates the extent to which euro area monetary policy has responded to evolving economic conditions in individual member states as opposed to the euro area as a whole. Based on a forward-looking Taylor rule-type policy reaction function, we conduct counterfactual exercises that compare the monetary policy behaviour of the ECB under alternative hypothetical scenarios: (1) the euro member states make individual policy decisions, and (2) the ECB responds to the economic conditions of individual members. Stress measures are then constructed to evaluate the degree of divergence of member state economies under these two hypothetical scenarios. The results we obtain reflect the extent of heterogeneity among the national economies in the monetary union, indicating that euro area policy rates have been particularly close to the ‘counterfactual’ interest rates of the largest euro members and countries with similar economic conditions, namely Germany, Austria, Belgium and France.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0911netti.pdf
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Paper provided by Bank of Finland in its series Research Discussion Papers with number 11/2009.

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Length: 35 pages
Date of creation: 07 Apr 2009
Date of revision:
Handle: RePEc:hhs:bofrdp:2009_011
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/

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  1. Thomas Laubach & John C. Williams, 2001. "Measuring the natural rate of interest," Finance and Economics Discussion Series 2001-56, Board of Governors of the Federal Reserve System (U.S.).
  2. Gerlach, Stefan & Svensson, Lars E O, 2002. "Money and Inflation in the Euro-Area: A Case for Monetary Indicators?," CEPR Discussion Papers 3392, C.E.P.R. Discussion Papers.
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  5. Carstensen, Kai, 2006. "Estimating the ECB policy reaction function," Munich Reprints in Economics 19941, University of Munich, Department of Economics.
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  9. Mehrotra, Aaron, 2007. "A note on the national contributions to euro area M3," Research Discussion Papers 2/2007, Bank of Finland.
  10. Gebhard Flaig & Timo Wollmershäuser, 2007. "Does the Euro-zone Diverge? A Stress Indicator for Analyzing Trends and Cycles in Real GDP and Inflation," CESifo Working Paper Series 1937, CESifo Group Munich.
  11. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
  12. John P. Judd & Glenn D. Rudebusch, 1998. "Taylor's rule and the Fed, 1970-1997," Economic Review, Federal Reserve Bank of San Francisco, pages 3-16.
  13. Stefan Gerlach & Katrin Assenmacher-Wesche, 2006. "Interpreting Euro area inflation at high and low frequencies," BIS Working Papers 195, Bank for International Settlements.
  14. Anton Muscatelli & Patrizio Tirelli & Carmine Trecroci, 2000. "Does Institutional Change Really Matter? Inflation Targets, Central Bank Reform and Interest Rate Policy in the OECD Countries," CESifo Working Paper Series 278, CESifo Group Munich.
  15. Jan-Egbert Sturm & Timo Wollmershäuser, 2008. "The Stress of Having a Single Monetary Policy in Europe," CESifo Working Paper Series 2251, CESifo Group Munich.
  16. Lee, Jim, 2000. "The Robustness of Okun's Law: Evidence from OECD Countries," Journal of Macroeconomics, Elsevier, vol. 22(2), pages 331-356, April.
  17. Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, vol. 62(6), pages 1383-1414, November.
  18. Lars E.O. Svensson, 2000. "The First Year of the Eurosystem: Inflation Targeting or Not?," NBER Working Papers 7598, National Bureau of Economic Research, Inc.
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