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US–Euro Area Monetary Policy Interdependence – New Evidence from Taylor Rule Based VECMs

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  • Belke, Ansgar
  • Cui, Yuhua

Abstract

This paper analyses the monetary policy interdependence between the European Central Bank (ECB) and the Federal Reserve (Fed) for the period 1999-2006. Two models are specified: a partial Vector Error Correction Model (VECM) and a general VECM. In the partial VECM, we look for a long-run interdependent relationship between the interest rates of the two currency areas and specify the Taylor Rule terms as exogenous variables. In the general VECM, we regard all variables as endogenous, and look for long-run equilibrium relationships among them, which may reveal monetary policy interdependence between the two central banks. Weak exogeneity is checked in both models in order to establish a possible leader-follower relationship. The empirical results of both models indicate interdependence between the ECB and the Fed, but only the general VECM testifies a leader-follower pattern between the two central banks. According to this pattern, the ECB does follow the Fed.

Suggested Citation

  • Belke, Ansgar & Cui, Yuhua, 2009. "US–Euro Area Monetary Policy Interdependence – New Evidence from Taylor Rule Based VECMs," Ruhr Economic Papers 85, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    • Handle: RePEc:zbw:rwirep:85
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    Cited by:

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    2. Raputsoane, Leroi, 2018. "Leader followership in monetary policy coordination," MPRA Paper 121905, University Library of Munich, Germany.
    3. Belke, Ansgar, 2017. "Central bank communication: Managing expectations through the monetary dialogue," Ruhr Economic Papers 692, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    4. Rangan Gupta & Charl Jooste, 2018. "Unconventional monetary policy shocks in OECD countries: how important is the extent of policy uncertainty?," International Economics and Economic Policy, Springer, vol. 15(3), pages 683-703, July.
    5. Raputsoane, Leroi, 2018. "Monetary policy coordination leader followership," MPRA Paper 85684, University Library of Munich, Germany.
    6. Cour-Thimann, Philippine & Jung, Alexander, 2020. "Interest rate setting and communication at the ECB," Working Paper Series 2443, European Central Bank.
    7. Beckmann, Joscha & Belke, Ansgar & Dreger, Christian, 2017. "The relevance of international spillovers and asymmetric effects in the Taylor rule," The Quarterly Review of Economics and Finance, Elsevier, vol. 64(C), pages 162-170.
    8. Fricke, Daniel, 2010. "Contagion between European and US banks: Evidence from equity prices," Kiel Working Papers 1667, Kiel Institute for the World Economy (IfW Kiel).
    9. Ansgar Belke, 2014. "Monetary dialogue 2009–2014: Looking backward, looking forward," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 49(4), pages 204-211, July.
    10. repec:zbw:rwirep:0477 is not listed on IDEAS
    11. Martin Mandler, 2010. "Explaining ECB and FED interest rate correlation: Economic interdependence and optimal monetary policy," MAGKS Papers on Economics 201025, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    12. Belke, Ansgar & Schnabl, Gunther, 2010. "Finanzkrise, globale Liquidität und makroökonomischer Exit," IBES Diskussionsbeiträge 184, University of Duisburg-Essen, Institute of Business and Economic Studie (IBES).
    13. Taguchi, Hiroyuki, 2020. "Monetary Policy Rule and Taylor Principle in Emerging ASEAN Economies: GMM and DSGE Approaches," MPRA Paper 100847, University Library of Munich, Germany.
    14. Renée Fry-McKibbin & Kate McKinnon & Vance L Martin, 2022. "Measuring Global Interest Rate Comovements with Implications for Monetary Policy Interdependence," RBA Annual Conference Papers acp2022-07, Reserve Bank of Australia, revised Dec 2022.
    15. Carvalho, Alexandre & Valle e Azevedo, João & Pires Ribeiro, Pedro, 2024. "Permanent and temporary monetary policy shocks and the dynamics of exchange rates," Journal of International Economics, Elsevier, vol. 147(C).
    16. Schuler, Tobias & Sun, Yiqiao, 2022. "The current account and monetary policy in the euro area," Working Paper Series 2696, European Central Bank.
    17. Fang‐Shuo Chang & Shiu‐Sheng Chen & Po‐Yuan Wang, 2020. "Politics and the UK's monetary policy," Scottish Journal of Political Economy, Scottish Economic Society, vol. 67(5), pages 486-522, November.
    18. Eleftheriou, Maria & Kouretas, Georgios P., 2023. "Monetary policy rules and inflation control in the US," Economic Modelling, Elsevier, vol. 119(C).
    19. Klose, Jens, 2014. "Determining structural breaks in central bank reaction functions of the financial crisis," The Journal of Economic Asymmetries, Elsevier, vol. 11(C), pages 78-90.
    20. Cour-Thimann, Philippine & Jung, Alexander, 2021. "Interest-rate setting and communication at the ECB in its first twenty years," European Journal of Political Economy, Elsevier, vol. 70(C).
    21. Ansgar Belke, 2014. "Monetary Dialogue 2009-2014 – Looking Backward, Looking Forward," Ruhr Economic Papers 0477, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    22. Ahmad Hassan Ahmad & Stephen Brown, 2017. "Re-examining the ECB’s two-pillar monetary policy strategy: Are there any deviations during and the pre-financial crisis periods?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 44(3), pages 585-607, August.
    23. Jung, Alexander, 2018. "Does McCallum’s rule outperform Taylor’s rule during the financial crisis?," The Quarterly Review of Economics and Finance, Elsevier, vol. 69(C), pages 9-21.
    24. Cleomar Gomes da silva & Flavio V. Vieira, 2016. "Monetary policy decision making: the role of ideology, institutions and central bank independence," Economics Bulletin, AccessEcon, vol. 36(4), pages 2051-2062.

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    More about this item

    Keywords

    Monetary policy; interdependence; European Central Bank; Federal Reserve; Taylor rule; VECM;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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