42 Pages Posted: 24 Oct 2007
Date Written: October 2007
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.
Suggested Citation: Suggested Citation
Christiano, Lawrence J. and Motto, Roberto and Rostagno, Massimo, Shocks, Structures or Monetary Policies? The Euro Area and Us after 2001 (October 2007). NBER Working Paper No. w13521. Available at SSRN: https://ssrn.com/abstract=1024125