The Stress of Having a Single Monetary Policy in Europe
KOF Working Paper No. 190
45 Pages Posted: 19 Mar 2008
Date Written: March 2008
This paper estimates forward-looking Taylor rules for the euro area. Using the asymmetries in inflation and cyclical output developments across countries, we investigate the adequacy of the single monetary policy for each of the European Monetary Union (EMU) member countries. Notable differences emerge across the countries. Taking a euro area perspective, we also show that it depends upon the underlying country weighting scheme in the monetary decision process of the ECB whether or not there has been a synchronisation of business and inflation cycles among the EMU member countries over the years. Finally, we produce an estimate of the actual policy weights the ECB has implicitly attached to each of the member countries. Developments in small member countries have received more than proportional weights in actual monetary policy decisions of the ECB.
Keywords: Taylor rule, monetary policy, ECB, stress, business cycle synchronisation
JEL Classification: C22, E52, E58
Suggested Citation: Suggested Citation