Differences in Interest Rate Policy at the ECB and the Fed: An Investigation with a Medium-Scale DSGE Model

29 Pages Posted: 9 Oct 2010  

Frank Smets

European Central Bank (ECB); KU Leuven - Center for Economic Studies

Jean-Guillaume Sahuc

Banque de France

Date Written: September 2007

Abstract

Using two estimated models for the euro area and the United States, this paper investigates whether the observed difference in the amplitude of the interest rate cycle since 1999 in both areas is due to differences in the estimated monetary policy reaction function, differences in the structure of the economy or differences in the size and nature of the shocks hitting both economies. The paper concludes that differences in the type, size and persistence of shocks in both areas can largely explain the different interest rate setting.

Keywords: Policy activism, DSGE model, interest rates, macroeconomic shocks

JEL Classification: C51, E52, E58

Suggested Citation

Smets, Frank and Sahuc, Jean-Guillaume, Differences in Interest Rate Policy at the ECB and the Fed: An Investigation with a Medium-Scale DSGE Model (September 2007). Banque de France Working Paper No. 182. Available at SSRN: https://ssrn.com/abstract=1689429 or http://dx.doi.org/10.2139/ssrn.1689429

Frank Smets (Contact Author)

European Central Bank (ECB) ( email )

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KU Leuven - Center for Economic Studies ( email )

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Jean-Guillaume Sahuc

Banque de France ( email )

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France
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