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Is the View from the Eurotower Purely European? National Divergence and ECB Interest Rate Policy

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  • Heinemann, Friedrich
  • Huefner, Felix P.

Abstract

The official view on ECB monetary policy claims that monetary decisions are based solely on average data for the euro zone and that diverging regional developments are disregarded. However, experience from other two tier central banks and theoretical considerations suggest that this official view cannot be accepted without empirical testing. A generalised monetary policy reaction function is developed which allows for an influence of regional divergence. The empirical tests are based on reaction function estimations and a probit model of interest rate decisions for the first years of the euro area. The results offer some first weak support for an impact of regional divergence in ECB decision making. The results further clarify that ignoring a potential national perspective may lead to a serious bias in the estimation of ECB reaction functions. The paper concludes that the correct identification of a possible impact of regional divergence is important for the transparency issue.

Suggested Citation

  • Heinemann, Friedrich & Huefner, Felix P., 2002. "Is the View from the Eurotower Purely European? National Divergence and ECB Interest Rate Policy," ZEW Discussion Papers 02-69, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:536
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    JEL classification:

    • 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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