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

24 Pages Posted: 30 Mar 2003

See all articles by Friedrich Heinemann

Friedrich Heinemann

ZEW – Leibniz Centre for European Economic Research; University of Heidelberg - Alfred Weber Institute for Economics

Felix P. Hüfner

Organization for Economic Co-Operation and Development (OECD)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2002

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.

Keywords: ECB, monetary policy, Taylor rule

JEL Classification: E58

Suggested Citation

Heinemann, Friedrich and Hüfner, Felix P., Is the View from the Eurotower Purely European? - National Divergence and ECB Interest Rate Policy (October 2002). ZEW Discussion Paper No. 02-69, Available at SSRN: https://ssrn.com/abstract=374600 or http://dx.doi.org/10.2139/ssrn.374600

Friedrich Heinemann (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

HOME PAGE: http://www.zew.de

University of Heidelberg - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany

Felix P. Hüfner

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

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