IDEAS home Printed from https://ideas.repec.org/p/baf/cbafwp/cbafwp23209.html
   My bibliography  Save this paper

Monetary Policy in the COVID Era and Beyond: the Fed vs the ECB

Author

Listed:
  • Carlo A. Favero
  • Ruben Fernandez-Fuertes

Abstract

This study examines monetary policy during and post-COVID by analysing innovative specifications for monetary policy rules based on data from before the pandemic. It models trends in short-term rates using a stochastic trend, driven by potential output growth, demographic age distribution, and inflation expectations both the US and the Eurozone. The cyclical variations in shortterm rates are associated with monetary policy through the conventional Taylor rule indicators. Whilst the standard model is robust for the US both in and outof- sample, the Eurozone displays less consistent in-sample results and marked deviations in out-of-sample tests. Addressing the ECB’s concerns about bond market fragmentation doesn’t yield better results. Instead, a model in which the ECB follows the US example with caution and delay proves more effective.

Suggested Citation

  • Carlo A. Favero & Ruben Fernandez-Fuertes, 2023. "Monetary Policy in the COVID Era and Beyond: the Fed vs the ECB," BAFFI CAREFIN Working Papers 23209, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    • Handle: RePEc:baf:cbafwp:cbafwp23209
    as

    Download full text from publisher

    File URL: https://repec.unibocconi.it/baffic/baf/papers/cbafwp23209.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 147-180.
    2. Bisetti, Emilio & Favero, Carlo A. & Nocera, Giacomo & Tebaldi, Claudio, 2017. "A Multivariate Model of Strategic Asset Allocation with Longevity Risk," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(5), pages 2251-2275, October.
    3. Uhlig, Harald, 2007. "Monetary policy in Europe vs the US: what explains the difference?," MPRA Paper 14119, University Library of Munich, Germany.
    4. Goliński, Adam & Zaffaroni, Paolo, 2016. "Long memory affine term structure models," Journal of Econometrics, Elsevier, vol. 191(1), pages 33-56.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Akosah, Nana Kwame & Alagidede, Imhotep Paul & Schaling, Eric, 2020. "Testing for asymmetry in monetary policy rule for small-open developing economies: Multiscale Bayesian quantile evidence from Ghana," The Journal of Economic Asymmetries, Elsevier, vol. 22(C).
    2. Adnan Haider Bukhari & Safdar Ullah Khan, 2008. "A Small Open Economy DSGE Model for Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 47(4), pages 963-1008.
    3. Douglas Sutherland & Peter Hoeller & Balázs Égert & Oliver Röhn, 2010. "Counter-cyclical Economic Policy," OECD Economics Department Working Papers 760, OECD Publishing.
    4. Benigno, Pierpaolo & Paciello, Luigi, 2014. "Monetary policy, doubts and asset prices," Journal of Monetary Economics, Elsevier, vol. 64(C), pages 85-98.
    5. Ireland, Peter N., 2003. "Endogenous money or sticky prices?," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1623-1648, November.
    6. Nautz, Dieter & Strohsal, Till & Netšunajev, Aleksei, 2019. "The Anchoring Of Inflation Expectations In The Short And In The Long Run," Macroeconomic Dynamics, Cambridge University Press, vol. 23(5), pages 1959-1977, July.
    7. Dumas, Bernard & Savioz, Marcel René, 2020. "A Theory of the Nominal Character of Stock Securities," CEPR Discussion Papers 15507, C.E.P.R. Discussion Papers.
    8. Alex Cukierman & Anton Muscatelli, 2001. "Do Central Banks have Precautionary Demands for Expansions and for Price Stability?," Working Papers 2002_4, Business School - Economics, University of Glasgow, revised Mar 2002.
    9. Luca Benati & Paolo Surico, 2009. "VAR Analysis and the Great Moderation," American Economic Review, American Economic Association, vol. 99(4), pages 1636-1652, September.
    10. Barthélemy, Jean & Marx, Magali, 2017. "Solving endogenous regime switching models," Journal of Economic Dynamics and Control, Elsevier, vol. 77(C), pages 1-25.
    11. Eschenhof, Sabine, 2009. "Standard Taylor rules revisited: A cross country study for European countries," Darmstadt Discussion Papers in Economics 196, Darmstadt University of Technology, Department of Law and Economics.
    12. Molnárová, Zuzana & Reiter, Michael, 2022. "Technology, demand, and productivity: What an industry model tells us about business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 134(C).
    13. Bing Tong & Guang Yang, 2020. "A Fixed-Interest-Rate New Keynesian Model of China," CFDS Discussion Paper Series 2020/1, Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China.
    14. Adolfson, Malin, 2001. "Monetary Policy with Incomplete Exchange Rate Pass-Through," SSE/EFI Working Paper Series in Economics and Finance 476, Stockholm School of Economics.
    15. Kenneth N Kuttner, 2004. "A Snapshot of Inflation Targeting in its Adolescence," RBA Annual Conference Volume (Discontinued), in: Christopher Kent & Simon Guttmann (ed.),The Future of Inflation Targeting, Reserve Bank of Australia.
    16. Francesco Bianchi, 2013. "Regime Switches, Agents' Beliefs, and Post-World War II U.S. Macroeconomic Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(2), pages 463-490.
    17. Ahmed, M. Iqbal & Cassou, Steven P., 2021. "Asymmetries in the effects of unemployment expectation shocks as monetary policy shifts with economic conditions," Economic Modelling, Elsevier, vol. 100(C).
    18. Jean-Bernard Chatelain & Kirsten Ralf, 2017. "Can We Identify the Fed's Preferences?," Working Papers halshs-01549908, HAL.
    19. Stefano Eusepi, 2005. "Comparing forecast-based and backward-looking Taylor rules: a "global" analysis," Staff Reports 198, Federal Reserve Bank of New York.
    20. Tervala, Juha, 2013. "Learning by devaluating: A supply-side effect of competitive devaluation," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 275-290.

    More about this item

    Keywords

    Monetary Policy Rules; Trends and Cycles; Fed; ECB.;
    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
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    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:baf:cbafwp:cbafwp23209. See general information about how to correct material in RePEc.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michela Pozzi (email available below). General contact details of provider: https://edirc.repec.org/data/cbbocit.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.