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Shocks, Structures or Monetary Policies? The Euro Area and US After 2001

51 Pages Posted: 11 Jul 2007  

Lawrence J. Christiano

Northwestern University; Federal Reserve Bank of Cleveland; Federal Reserve Bank of Chicago; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)

Roberto Motto

European Central Bank (ECB)

Massimo Rostagno

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2007

Abstract

The US Federal Reserve cut interest rates more vigorously in the recent recession than the European Central Bank did. By comparison with the Fed, the ECB followed a more measured course of action. We use an estimated dynamic general equilibrium model with financial frictions to show that comparisons based on such simple metrics as the variance of policy rates are misleading. We find that - because there is greater inertia in the ECB's policy rule - the ECB's policy actions actually had a greater stabilizing effect than did those of the Fed. As a consequence, a potentially severe recession turned out to be only a slowdown, and inflation never departed from levels consistent with the ECB's quantitative definition of price stability. Other factors that account for the different economic outcomes in the Euro Area and US include differences in shocks and differences in the degree of wage and price flexibility.

Keywords: Policy activism, DSGE model, policy inertia, shocks

JEL Classification: C51, E52, E58

Suggested Citation

Christiano, Lawrence J. and Motto, Roberto and Rostagno, Massimo, Shocks, Structures or Monetary Policies? The Euro Area and US After 2001 (July 2007). ECB Working Paper No. 774. Available at SSRN: https://ssrn.com/abstract=997250

Lawrence J. Christiano (Contact Author)

Northwestern University ( email )

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Federal Reserve Bank of Cleveland

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Federal Reserve Bank of Chicago

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Federal Reserve Bank of Minneapolis

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National Bureau of Economic Research (NBER)

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Roberto Motto

European Central Bank (ECB) ( email )

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Massimo Rostagno

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Postfach 16 03 19
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Germany
+49 69 1344 7663 (Phone)
+49 69 1344 7604 (Fax)

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