National information and euro area monetary policy: a generalized ordered choice approach

Christina Bräuning () and Ralf Fendel ()
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Christina Bräuning: De Nederlandsche Bank
Ralf Fendel: WHU - Otto Beisheim School of Management

Empirical Economics, 2018, vol. 54, issue 2, No 8, 522 pages

Abstract: Abstract We empirically analyze the influence of inflationary pressure originating from persistent national misalignments on the ECB’s interest rate decisions between 2000 and mid-2010. To do so, we introduce an indicator that summarizes the threat to euro area price stability originating from self-reinforcing expected inflation differentials. The indicator is computed based on persistent deviations of national expected inflation and GDP growth rates from the corresponding euro area aggregate. It thereby captures area-wide excess demand pressure on the euro area inflation rate. In order to determine the information content of this indicator, we add it to an empirical monetary policy reaction function. We then analyze this reaction function in the framework of a generalized ordered choice model that fits the data a lot better than its commonly used, more restricted counterpart. Within this empirical framework, we find that after controlling for several area-wide aggregates, national information does not provide additional information that is indicative of the ECB’s policy rate decision.

Keywords: Central banking; National information; Discrete regression; Inflation differentials (search for similar items in EconPapers)
JEL-codes: C25 E52 E58 F33 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s00181-017-1238-1

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