Behind Closed Doors: Revealing the ECB’S Decision Rule

Joint Discussion Paper Series in Economics, Paper No. 35-2011

38 Pages Posted: 19 Sep 2011

See all articles by Bernd Hayo

Bernd Hayo

University of Marburg - School of Business & Economics

Pierre-Guillaume Meon

Université Libre de Bruxelles (ULB); Université Robert Schuman Strasbourg III

Date Written: September 19, 2011

Abstract

This paper aims at discovering the decision rule the Governing Council of the ECB uses to set interest rates. We construct a Taylor rule for each member of the council and for the euro area as a whole, and aggregate the interest rates they produce using several classes of decision-making mechanisms: chairman dominance, bargaining, consensus, voting, and voting with a chairman. We test alternative scenarios in which individual members of the council pursue either a national or a federal objective. We then compare the interest-rate path predicted by each scenario with the observed euro area’s interest rate. We find that scenarios in which all members of the Governing Council are assumed to pursue Euro-area-wide objectives are dominated by scenarios in which decisions are made collectively by a council consisting of members pursuing national objectives. The best-performing scenario is the one in which individual members of the Governing Council follow national objectives, bargain over the interest rate, and their weights are based on their country’s share of the zone’s GDP.

Keywords: European Central Bank, monetary policy committee, decision rules

JEL Classification: D70, E43, E58, F33

Suggested Citation

Hayo, Bernd and Meon, Pierre-Guillaume, Behind Closed Doors: Revealing the ECB’S Decision Rule (September 19, 2011). Joint Discussion Paper Series in Economics, Paper No. 35-2011. Available at SSRN: https://ssrn.com/abstract=1930187 or http://dx.doi.org/10.2139/ssrn.1930187

Bernd Hayo (Contact Author)

University of Marburg - School of Business & Economics ( email )

Universitaetsstr. 24
Marburg, D-35032
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Pierre-Guillaume Meon

Université Libre de Bruxelles (ULB) ( email )

CP 132 Av FD Roosevelt 50
Brussels, Brussels 1050
Belgium

Université Robert Schuman Strasbourg III ( email )

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Institut d'Etudes Politiques
67082 Strasbourg Cedex
France
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33 3 88 41 77 78 (Fax)

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