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Evaluating the stresses from ECB monetary policy in the euro area

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  • Lee, Jim
  • Crowley, Patrick M.

Abstract

This paper investigates the extent to which euro area monetary policy has responded to evolving economic conditions in individual member states as opposed to the euro area as a whole. Based on a forward-looking Taylor rule-type policy reaction function, we conduct counterfactual exercises that compare the monetary policy behaviour of the ECB under alternative hypothetical scenarios: (1) the euro member states make individual policy decisions, and (2) the ECB responds to the economic conditions of individual members. Stress measures are then constructed to evaluate the degree of divergence of member state economies under these two hypothetical scenarios. The results we obtain reflect the extent of heterogeneity among the national economies in the monetary union, indicating that euro area policy rates have been particularly close to the 'counterfactual' interest rates of the largest euro members and countries with similar economic conditions, namely Germany, Austria, Belgium and France.

Suggested Citation

  • Lee, Jim & Crowley, Patrick M., 2009. "Evaluating the stresses from ECB monetary policy in the euro area," Bank of Finland Research Discussion Papers 11/2009, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2009_011
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    References listed on IDEAS

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    More about this item

    Keywords

    European Central Bank; monetary policy reaction; Taylor rule; counterfactual analysis;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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