IDEAS home Printed from https://ideas.repec.org/p/use/tkiwps/0503.html
   My bibliography  Save this paper

What Drives ECB Monetary Policy?

Author

Listed:
  • C.J.M. Kool

Abstract

In this paper I have analyzed ECB interest rate setting in the first 5 years of its existence. Contrary to popular belief and continuous ECB statements, the ECB has not acted has as an obsessed inflation fighter. By any measure, output considerations do play a significant role in the ECB’s policy rule. If anything, the ECB has been on the loose side, especially since 2001, when taking economic development in the euro area as a whole as the starting point. Actual interest rates have been consistent with German (and to a lesser extent French) preferences, however. It suggests the ECB puts a dominant weight on German economic developments. Small peripheral countries receive too low weight rather than too high. In case the ECB actually focuses on euro area wide developments, its looseness is comparable to that of the Fed. In case ECB policy actually is geared towards Germany’s preferences – or perhaps the average German-French preferences -- the ECB has been much closer to a standard Taylor-rule interest rate setting than the Fed. In that scenario, the Fed indeed has been much more aggressive in the lowering of its interest rates in the face of adverse economic shocks.

Suggested Citation

  • C.J.M. Kool, 2005. "What Drives ECB Monetary Policy?," Working Papers 05-03, Utrecht School of Economics.
  • Handle: RePEc:use:tkiwps:0503
    as

    Download full text from publisher

    File URL: https://dspace.library.uu.nl/bitstream/handle/1874/14980/05-03.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Arnold, Ivo J.M., 2006. "Optimal regional biases in ECB interest rate setting," European Journal of Political Economy, Elsevier, vol. 22(2), pages 307-321, June.
    2. Y. Adema, 2003. "A taylor rule for the euro area based on quasi-real time data," WO Research Memoranda (discontinued) 738, Netherlands Central Bank, Research Department.
    3. Maria ELEFTHERIOU, 2003. "On the Robustness of the "Taylor Rule" in the EMU," Economics Working Papers ECO2003/17, European University Institute.
    4. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
    5. Friedrich Heinemann & Felix P. Huefner, 2004. "Is The View From The Eurotower Purely European? - National Divergence And Ecb Interest Rate Policy," Scottish Journal of Political Economy, Scottish Economic Society, vol. 51(4), pages 544-558, September.
    6. Gerlach, Stefan & Schnabel, Gert, 2000. "The Taylor rule and interest rates in the EMU area," Economics Letters, Elsevier, vol. 67(2), pages 165-171, May.
    7. Helge Berger & Jakob de Haan & Robert Inklaar, 2003. "Restructuring the ECB," CESifo Working Paper Series 1084, CESifo Group Munich.
    8. Bernd Hayo & Boris Hofmann, 2003. "Monetary Policy Reaction Functions: ECB versus Bundesbank," Macroeconomics 0312007, EconWPA.
    9. Fourcans, Andre & Vranceanu, Radu, 2004. "The ECB interest rate rule under the Duisenberg presidency," European Journal of Political Economy, Elsevier, vol. 20(3), pages 579-595, September.
    10. I. Arnold & C.J.M. Kool, 2004. "The Role of Inflation Differentials in Regional Adjustment: Evidence from the United States," Working Papers 04-13, Utrecht School of Economics.
    11. von Hagen, Jürgen & Brückner, Matthias, 2001. "Monetary policy in unknown territory: The European Central Bank in the early years," ZEI Working Papers B 18-2001, University of Bonn, ZEI - Center for European Integration Studies.
    12. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Arnold, Ivo J.M., 2006. "Optimal regional biases in ECB interest rate setting," European Journal of Political Economy, Elsevier, vol. 22(2), pages 307-321, June.
    2. H.J. Roelfsema, 2006. "Why are Federal Central Banks more Activist?," Working Papers 06-06, Utrecht School of Economics.
    3. 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.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:use:tkiwps:0503. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marina Muilwijk). General contact details of provider: http://edirc.repec.org/data/eiruunl.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.