Explaining ECB and FED interest rate correlation: Economic interdependence and optimal monetary policy

Martin Mandler

No 201025, MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung)

Abstract: 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.

Keywords: optimal monetary policy; monetary policy reaction function; vector autoregressions (search for similar items in EconPapers)
JEL-codes: E47 E52 E58 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2010
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Explaining ECB and Fed interest rate correlation: Economic interdependence and optimal monetary policy (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:mar:magkse:201025

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