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The Monetary Policy of the ECB: Caring for the Weakest Links
Author(s) -
Drometer Marcus,
Siemsen Thomas,
Watzka Sebastian
Publication year - 2018
Publication title -
kyklos
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.766
H-Index - 58
eISSN - 1467-6435
pISSN - 0023-5962
DOI - 10.1111/kykl.12185
Subject(s) - counterfactual thinking , economics , monetary policy , taylor rule , financial crisis , interest rate , output gap , macroeconomics , monetary economics , econometrics , central bank , philosophy , epistemology
Summary This paper investigates the extent to which national economic conditions matter in the ECB's decision process. We employ various decision models to aggregate counterfactual national interest rates based on Taylor rule estimates and test which of the resulting interest paths fits best to the actual monetary policy in the euro area. As a novel feature, we introduce decision models where countries that fare economically worse than the euro area average obtain a higher weight in the decision process. Our results suggest that these models explain actual ECB policy better than GDP‐based bargaining models that have been highlighted in the previous literature. Thus, the ECB seems to have emphasized the needs of countries that face an economic crisis disproportionately highly even before the advent of the financial crisis.