Optimal Regional Biases in ECB Interest Rate Setting

NRG Working Paper Series # 05-01

24 Pages Posted: 23 Feb 2006

See all articles by Ivo J.M. Arnold

Ivo J.M. Arnold

Nyenrode University; Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: November 2005

Abstract

This paper uses a simple model of optimal monetary policy to consider whether the influence of national output and inflation rates on ECB interest rate setting should equal a country's weight in the eurozone economy. The findings depend on assumptions regarding interest rate elasticities, exchange rate elasticities, and openness vis-à-vis non-eurozone countries. The major conclusion is that the ECB should respond less to inflation shocks in EMU countries that have strong trading ties with non-eurozone countries. Intuitively, these countries can take care of some of the monetary tightening themselves, through a real appreciation vis-à-vis their non-eurozone trading partners.

Keywords: EMU, Taylor rule, Optimal monetary policy

JEL Classification: E52, E58

Suggested Citation

Arnold, Ivo J.M., Optimal Regional Biases in ECB Interest Rate Setting (November 2005). NRG Working Paper Series # 05-01. Available at SSRN: https://ssrn.com/abstract=882799 or http://dx.doi.org/10.2139/ssrn.882799

Ivo J.M. Arnold (Contact Author)

Nyenrode University ( email )

3621 BG Breukelen
Netherlands
+31-346-291270 (Phone)
+31-346-291250 (Fax)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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