Should the Euro Area be Run as a Closed Economy?
This paper studies monetary policy in the Euro area looking at the variable most directly related to current and expected monetary policy, the yield on long term government bonds. We find that the level of longterm rates in Europe is almost entirely explained by U.S. shocks and by the systematic response of U.S. and European variables (inflation, short term rates and the output gap) to these shocks. Our results suggest in particular that U.S. variables are more important than local variables in the policy rule followed by European monetary authorities: this was true for the Bundesbank before EMU and has remained true for the ECB, at least so far. Using closed economy models to analyze monetary policy in the Euro is thus inconsistent with the empirical evidence on the determinants of Euro area long-term rates. It is also inconsistent with the way the Governing Council of the ECB appears to make actual policy decisions.
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- Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999.
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in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148
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- Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Monetary policy shocks: what have we learned and to what end?," Working Paper Series, Macroeconomic Issues WP-97-18, Federal Reserve Bank of Chicago.
- Dées, Stéphane & Vansteenkiste, Isabel, 2007. "The transmission of US cyclical developments to the rest of the world," Working Paper Series 0798, European Central Bank.
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- Charles L. Evans & David A. Marshall, 1997.
"Monetary policy and the term structure of nominal interest rates: evidence and theory,"
Working Paper Series, Macroeconomic Issues
WP-97-10, Federal Reserve Bank of Chicago.
- Evans, Charles L. & Marshall, David A., 1998. "Monetary policy and the term structure of nominal interest rates: Evidence and theory," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 53-111, December.
- Roush, Jennifer E., 2007. "The expectations theory works for monetary policy shocks," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1631-1643, September.
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