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Behind closed doors: Revealing the ECB’s Decision Rule

  • Bernd Hayo
  • Pierre-Guillaume Méon

This paper aims at discovering the decision rule the Governing Council of the ECB uses to set interest rates. We construct a Taylor rule for each member of the council and for the euro area as a whole, and aggregate the interest rates they produce using several classes of decision-making mechanisms: chairman dominance, bargaining, consensus, voting, and voting with a chairman. We test alternative scenarios in which individual members of the council pursue either a national or a federal objective. We then compare the interest-rate path predicted by each scenario with the observed euro area’s interest rate. We find that scenarios in which all members of the Governing Council are assumed to pursue Euro-area-wide objectives are dominated by scenarios in which decisions are made collectively by a council consisting of members pursuing national objectives. The best-performing scenario is the one in which individual members of the Governing Council follow national objectives, bargain over the interest rate, and their weights are based on their country’s share of the zone’s GDP.

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Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 13-025.

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Length: 51 p.
Date of creation: 27 May 2013
Date of revision:
Publication status: Published by:
Handle: RePEc:sol:wpaper:2013/143970
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