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Do National Economic Shocks Influence E uropean C entral B ank Interest Rate Decisions? The Impact of the Financial and Sovereign Debt Crises
Author(s) -
Bouvet Florence,
King Sharmila
Publication year - 2013
Publication title -
jcms: journal of common market studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.54
H-Index - 90
eISSN - 1468-5965
pISSN - 0021-9886
DOI - 10.1111/jcms.12001
Subject(s) - economics , inflation (cosmology) , monetary economics , interest rate , debt , real gross domestic product , finance , physics , theoretical physics
This article examines the relevance of national economic conditions for E uropean C entral B ank ( ECB ) interest rate setting and whether the financial and sovereign debt crises have made national divergences more relevant. Officially, the ECB sets policy for the eurozone and considers only eurozone data. However, economic shocks in one or more countries may warrant a deviation from this rule. Using real‐time, forecast data, the authors estimate a modified Taylor rule incorporating two macroeconomic ‘national influence’ measures: first the difference between the median and the eurozone measures of inflation and real gross domestic product ( GDP ) growth, and then deviations of the measures of inflation and real GDP growth for the ‘core’ and ‘periphery’ countries from eurozone averages. Using rolling‐window analysis to test the stability of parameter estimates, evidence is found that divergences in national data – notably developments in the periphery – from eurozone averages play an increasingly important role during the financial and sovereign debt crises.