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The Fed and the ECB: why such an apparent difference in reactivity?

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  • Alexis Penot
  • Grégory Levieuge

Abstract

Purpose - The purpose of this paper is to try to understand the reasons for the differences in amplitude of monetary policy (MP) rate cycles in the USA and the euro area. Among the different candidates, the paper aims to test the role of economic structures, macroeconomic shocks, and MP behaviour. Design/methodology/approach - The paper starts by estimating vector autoregressive models both for the USA and the euro area to identify the economic structures, the MP rules, and the macroeconomics shocks of both areas. Then, it runs counterfactual simulations (by injecting European Central Bank's (ECB) monetary rule in the US model for example) to examine which factors had the most significant impact on differences in MP activism (measured by the variance of interest rates). Findings - The paper finds that differences implied by MP rules alone cannot explain the dissimilarity of interest rates paths. In the same way, while cyclical shocks are different in each area, they do not suffice to explain the factual divergences. Finally, it is the structural dissimilarities which essentially explain the difference in interest rate variances. Originality/value - The paper brings new informations on a controversial issue and it tends to reject the official explanations given by ECB's governor who points out differences in shocks.

Suggested Citation

  • Alexis Penot & Grégory Levieuge, 2009. "The Fed and the ECB: why such an apparent difference in reactivity?," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 1(4), pages 319-337, November.
    • Handle: RePEc:eme:jfeppp:v:1:y:2009:i:4:p:319-337
    DOI: 10.1108/17576380911050052
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    Cited by:

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    2. Emmanuel Dubois & Jerome Hericourt & Valerie Mignon, 2009. "What if the euro had never been launched? A counterfactual analysis of the macroeconomic impact of euro membership," Economics Bulletin, AccessEcon, vol. 29(3), pages 2241-2255.

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    More about this item

    Keywords

    Monetary policy; United States of America; Europe;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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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