Abstract

http://ssrn.com/abstract=997250
 
 

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Shocks, Structures or Monetary Policies? The Euro Area and US After 2001


Lawrence J. Christiano


Northwestern University; Federal Reserve Bank of Cleveland; Federal Reserve Bank of Chicago; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)

Roberto Motto


European Central Bank (ECB)

Massimo Rostagno


European Central Bank (ECB)

July 2007

ECB Working Paper No. 774

Abstract:     
The US Federal Reserve cut interest rates more vigorously in the recent recession than the European Central Bank did. By comparison with the Fed, the ECB followed a more measured course of action. We use an estimated dynamic general equilibrium model with financial frictions to show that comparisons based on such simple metrics as the variance of policy rates are misleading. We find that - because there is greater inertia in the ECB's policy rule - the ECB's policy actions actually had a greater stabilizing effect than did those of the Fed. As a consequence, a potentially severe recession turned out to be only a slowdown, and inflation never departed from levels consistent with the ECB's quantitative definition of price stability. Other factors that account for the different economic outcomes in the Euro Area and US include differences in shocks and differences in the degree of wage and price flexibility.

Number of Pages in PDF File: 51

Keywords: Policy activism, DSGE model, policy inertia, shocks

JEL Classification: C51, E52, E58

working papers series


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Date posted: July 11, 2007  

Suggested Citation

Christiano, Lawrence J. and Motto, Roberto and Rostagno, Massimo, Shocks, Structures or Monetary Policies? The Euro Area and US After 2001 (July 2007). ECB Working Paper No. 774. Available at SSRN: http://ssrn.com/abstract=997250

Contact Information

Lawrence J. Christiano (Contact Author)
Northwestern University ( email )
2003 Sheridan Road
Evanston, IL 60208
United States
847-491-8231 (Phone)
847-491-7001 (Fax)
Federal Reserve Bank of Cleveland
East 6th & Superior
Cleveland, OH 44101-1387
United States
Federal Reserve Bank of Chicago
230 South LaSalle Street
Chicago, IL 60604
United States
Federal Reserve Bank of Minneapolis
90 Hennepin Avenue
Minneapolis, MN 55480
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Roberto Motto
European Central Bank (ECB) ( email )
Kaiserstrasse 29
Postfach 16 03 19
D-60311 Frankfurt am Main
Germany
Massimo Rostagno
European Central Bank (ECB) ( email )
Kaiserstrasse 29
Postfach 16 03 19
D-60311 Frankfurt am Main
Germany
+49 69 1344 7663 (Phone)
+49 69 1344 7604 (Fax)
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