How the ECB and US Fed set interest rates

Ansgar Belke and Thorsten Polleit

No 72, Frankfurt School - Working Paper Series from Frankfurt School of Finance and Management

Abstract: Monetary policies of the ECB and US Fed can be characterised by Taylor rules, that is both central banks seem to be setting rates by taking into account the output gap and inflation. We also set up and tested Taylor rules which incorporate money growth and the euro-dollar exchange rate, thereby improving the fit between actual and Taylor rule based rates. In general, Taylor rules appear to be a much better way of describing Fed policy than ECB policy. Simulations suggest that the ECB's short-term interest rates have been at a much lower level in the last two years compared with what a Taylor rule would suggest.

Keywords: European Central Bank; Federal Reserve; Monetary policy; Taylor rule (search for similar items in EconPapers)
JEL-codes: E43 E58 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (72)

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Related works:
Journal Article: How the ECB and the US Fed set interest rates (2007)
Working Paper: How the ECB and the US Fed Set Interest Rates (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:fsfmwp:72

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