The Monetary Policy of the ECB: Caring for the Weakest Links

20 Pages Posted: 15 Oct 2018

See all articles by Marcus Drometer

Marcus Drometer

affiliation not provided to SSRN

Thomas Siemsen

Ludwig Maximilian University of Munich (LMU)

Sebastian Watzka

Ludwig Maximilian University of Munich (LMU)

Date Written: November 2018

Abstract

This paper investigates the extent to which national economic conditions matter in the ECB's decision process. We employ various decision models to aggregate counterfactual national interest rates based on Taylor rule estimates and test which of the resulting interest paths fits best to the actual monetary policy in the euro area. As a novel feature, we introduce decision models where countries that fare economically worse than the euro area average obtain a higher weight in the decision process. Our results suggest that these models explain actual ECB policy better than GDP‐based bargaining models that have been highlighted in the previous literature. Thus, the ECB seems to have emphasized the needs of countries that face an economic crisis disproportionately highly even before the advent of the financial crisis.

Suggested Citation

Drometer, Marcus and Siemsen, Thomas and Watzka, Sebastian, The Monetary Policy of the ECB: Caring for the Weakest Links (November 2018). Kyklos, Vol. 71, Issue 4, pp. 537-556, 2018, Available at SSRN: https://ssrn.com/abstract=3265434 or http://dx.doi.org/10.1111/kykl.12185

Marcus Drometer (Contact Author)

affiliation not provided to SSRN

Thomas Siemsen

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

Sebastian Watzka

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

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