Explaining ECB and FED interest rate correlation: Economic interdependence and optimal monetary policy
This paper studies whether the observed high correlation between monetary policy in the U.S. and the Euro area can be explained by economic fundamentals, i.e. by macroeconomic interdependence between the two regions. We show that an optimal monetary policy reaction function for the ECB that accounts...
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| Published in: | MAGKS - Joint Discussion Paper Series in Economics (Band 25-2010) |
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| Main Author: | |
| Format: | Work |
| Language: | English |
| Published: |
Philipps-Universität Marburg
2010
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| Subjects: | |
| Online Access: | PDF Full Text |
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| Summary: | This paper studies whether the observed high correlation between monetary policy in the U.S. and the Euro area can be explained by economic fundamentals, i.e. by macroeconomic interdependence between the two regions. We show that an optimal monetary policy reaction function for the ECB that accounts explicitly for economic interrelationships between the two economies reproduces substantial parts of the observed patterns of interest rate correlation and represents a good approximation to the actually observed monetary policy of the ECB. It implies strong reactions to shocks to US variables, particularly to shocks to the Federal Funds Rate. |
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| Physical Description: | 48 Pages |
| ISSN: | 1867-3678 |
| DOI: | 10.17192/es2024.0055 |