Do National Economic Shocks Influence European Central Bank Interest Rate Decisions? The Impact of the Financial and Sovereign Debt Crises

20 Pages Posted: 8 Feb 2013

See all articles by Sharmila King

Sharmila King

University of the Pacific (UOP) - Department of Economics

Date Written: March 2013

Abstract

This article examines the relevance of national economic conditions for European Central Bank (ECB) interest rate setting and whether the financial and sovereign debt crises have made national divergences more relevant. Officially, the ECB sets policy for the eurozone and considers only eurozone data. However, economic shocks in one or more countries may warrant a deviation from this rule. Using real‐time, forecast data, the authors estimate a modified Taylor rule incorporating two macroeconomic ‘national influence’ measures: first the difference between the median and the eurozone measures of inflation and real gross domestic product (GDP) growth, and then deviations of the measures of inflation and real GDP growth for the ‘core’ and ‘periphery’ countries from eurozone averages. Using rolling‐window analysis to test the stability of parameter estimates, evidence is found that divergences in national data – notably developments in the periphery – from eurozone averages play an increasingly important role during the financial and sovereign debt crises.

Suggested Citation

King, Sharmila, Do National Economic Shocks Influence European Central Bank Interest Rate Decisions? The Impact of the Financial and Sovereign Debt Crises (March 2013). JCMS: Journal of Common Market Studies, Vol. 51, Issue 2, pp. 212-231, 2013, Available at SSRN: https://ssrn.com/abstract=2213740 or http://dx.doi.org/10.1111/jcms.12001

Sharmila King (Contact Author)

University of the Pacific (UOP) - Department of Economics ( email )

Stockton, CA 95211
United States

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