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Modeling interest rate setting at the European Central Bank with bargaining models and counterfactuals

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  • James McNeil

    (Dalhousie University)

Abstract

I analyze whether the interest rate decisions of the European Central Bank (ECB) favor the national interests of the largest euro-area member states. Because voting records are unavailable, unobserved monetary policy preferences are based on hypothetical interest rate paths generated from monetary policy rules estimated in the pre-euro era. Comparing the actual euro-area interest rate to these counterfactual interest rates, I do not find that ECB interest rates are best described by competing national interests. Instead, countries appear to make decisions with respect to euro-area economic conditions. These findings contradict several studies which find that policy disproportionately favors the national objectives of larger member states.

Suggested Citation

  • James McNeil, 2024. "Modeling interest rate setting at the European Central Bank with bargaining models and counterfactuals," Empirical Economics, Springer, vol. 66(3), pages 1037-1053, March.
    • Handle: RePEc:spr:empeco:v:66:y:2024:i:3:d:10.1007_s00181-023-02481-z
    DOI: 10.1007/s00181-023-02481-z
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    More about this item

    Keywords

    Monetary policy; European Central Bank; Interest rates; Taylor rule;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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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