Together or Apart? Monetary Policy Divergences in the G4

40 Pages Posted: 19 Jan 2019

See all articles by Samuel Howorth

Samuel Howorth

Centre for International Governance Innovation (CIGI)

Domenico Lombardi

Banca di San Marino

Pierre L. Siklos

Wilfrid Laurier University - School of Business & Economics; Balsillie school of international affairs

Date Written: November 3, 2018

Abstract

We evaluate monetary policy divergence in the G4. A Taylor rule is extended that admits a global element and also allows for unconventional monetary policy to be reflected in a shadow policy rate. We propose a policy divergence index based on observed, fitted, or shadow policy rates but which interprets the stance of monetary policy as being dictated by the real interest rate. In spite of flexible exchange rates, each economy’s monetary policy is significantly impacted by a global element, pre- and post-crisis. Our divergence index also suggests more divergence in the stance of monetary policy than if nominal policy rates alone are compared, whether observed or shadow rates are used. Nevertheless, we conclude that US monetary policy’s impact among other systemically important economies has increased since the global financial crisis, although divergences do persist.

Keywords: monetary policy rule, policy divergence, G4

JEL Classification: E58, E43, E31, E32

Suggested Citation

Howorth, Samuel and Lombardi, Domenico and Siklos, Pierre L., Together or Apart? Monetary Policy Divergences in the G4 (November 3, 2018). Available at SSRN: https://ssrn.com/abstract=3312830 or http://dx.doi.org/10.2139/ssrn.3312830

Samuel Howorth

Centre for International Governance Innovation (CIGI) ( email )

57 Erb Street West
Waterloo, Ontario N2L 6C2
Canada

Domenico Lombardi

Banca di San Marino ( email )

San Marino
Italy

Pierre L. Siklos (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Department of Economics
75 University Avenue W.
Waterloo, Ontario N2L 3C5
Canada
519-884-0710 Ext.. 3491 (Phone)

HOME PAGE: http://pierrelsiklos.com

Balsillie school of international affairs ( email )

67 Erb Street West
Waterloo, ON N2L 6C2
Canada

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