The Fed and the ECB: why such an apparent difference in reactivity?
Abstract
Purpose
The purpose of this paper is to try to understand the reasons for the differences in amplitude of monetary policy (MP) rate cycles in the USA and the euro area. Among the different candidates, the paper aims to test the role of economic structures, macroeconomic shocks, and MP behaviour.
Design/methodology/approach
The paper starts by estimating vector autoregressive models both for the USA and the euro area to identify the economic structures, the MP rules, and the macroeconomics shocks of both areas. Then, it runs counterfactual simulations (by injecting European Central Bank's (ECB) monetary rule in the US model for example) to examine which factors had the most significant impact on differences in MP activism (measured by the variance of interest rates).
Findings
The paper finds that differences implied by MP rules alone cannot explain the dissimilarity of interest rates paths. In the same way, while cyclical shocks are different in each area, they do not suffice to explain the factual divergences. Finally, it is the structural dissimilarities which essentially explain the difference in interest rate variances.
Originality/value
The paper brings new informations on a controversial issue and it tends to reject the official explanations given by ECB's governor who points out differences in shocks.
Keywords
Citation
Penot, A. and Levieuge, G. (2009), "The Fed and the ECB: why such an apparent difference in reactivity?", Journal of Financial Economic Policy, Vol. 1 No. 4, pp. 319-337. https://doi.org/10.1108/17576380911050052
Publisher
:Emerald Group Publishing Limited
Copyright © 2009, Emerald Group Publishing Limited