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Is European Monetary Policy Appropriate for the EMU Member Countries? A Counterfactual Analysis

Author

Listed:
  • Bernd Hayo

    (University of Marburg)

Abstract

This paper analyses whether interest rate paths in the EMU member countries would have been different if the previous national central banks had not handed over monetary policy to the ECB. Using estimates of monetary policy reaction functions over the last 20 years before the formation of EMU, we derive long-run rules the relate interest rate setting to the expected one-year ahead inflation rate and the current output gap. These Taylor rules allow to derive long-run target rates which are employed in the simulation of counterfactual interest rate paths over the time period January 1999 to December 2004 and then compared to actual short-term interest rates in the euro area. It is found that for almost all EMU member countries euro area interest rates tend to be below the national target interest rates, even after explicitly accounting for a lower real interest rate in the EMU period, with Germany being the only exception.

Suggested Citation

  • Bernd Hayo, 2007. "Is European Monetary Policy Appropriate for the EMU Member Countries? A Counterfactual Analysis," Money Macro and Finance (MMF) Research Group Conference 2006 36, Money Macro and Finance Research Group.
  • Handle: RePEc:mmf:mmfc06:36
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    References listed on IDEAS

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    1. Volker Clausen & Bernd Hayo, 2006. "Asymmetric monetary policy effects in EMU," Applied Economics, Taylor & Francis Journals, vol. 38(10), pages 1123-1134.
    2. Wyplosz, Charles, 1989. "Asymmetry in the EMS: Intentional or systemic?," European Economic Review, Elsevier, vol. 33(2-3), pages 310-320, March.
    3. 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.
    4. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.
    5. Castelnuovo, Efrem, 2003. "Taylor rules, omitted variables, and interest rate smoothing in the US," Economics Letters, Elsevier, vol. 81(1), pages 55-59, October.
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    7. Bernd Hayo & Boris Hofmann, 2006. "Comparing monetary policy reaction functions: ECB versus Bundesbank," Empirical Economics, Springer, pages 645-662.
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    Citations

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    Cited by:

    1. Papaspyrou, Theodoros S., 2007. "Economic policy in EMU: community framework and national strategies - focus on Greece," LSE Research Online Documents on Economics 5631, London School of Economics and Political Science, LSE Library.
    2. Adam Posen & Daniel Popov Gould, 2006. "Has EMU had any Impact on the Degree of Wage Restraint?," CESifo Working Paper Series 1783, CESifo Group Munich.
    3. Sebastian Dullien & Ulrich Fritsche, 2006. "How bad is Divergence in the Euro-Zone? Lessons from the United States of America and Germany," Macroeconomics and Finance Series 200605, Hamburg University, Department Wirtschaft und Politik.
    4. Hayo, Bernd & Méon, Pierre-Guillaume, 2013. "Behind closed doors: Revealing the ECB's decision rule," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 135-160.
    5. André Van Poeck, 2010. "One Money and Sixteen Needs: Has the ECB’s Monetary Policy Become More Balanced Towards the Needs of the Member States?," De Economist, Springer, vol. 158(1), pages 43-60, April.
    6. Zuzanna Urbanowicz, 2015. "Nieadekwatność polityki pieniężnej Europejskiego Banku Centralnego w procesie stabilizacji makroekonomicznej w strefie euro," Gospodarka Narodowa, Warsaw School of Economics, issue 4, pages 5-25.

    More about this item

    Keywords

    Taylor rule; monetary policy; ECB; European Monetary Union;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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