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Title:Explaining ECB and Fed interest rate correlation: Economic interdependence and optimal monetary policy PDF Logo
Authors:Mandler, Martin
Issue Date:2010
Series/Report no.:Joint discussion paper series in economics 25-2010
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.
Subjects:optimal monetary policy
monetary policy reaction function
vector autoregressions
JEL:E47
E52
E58
Document Type:Working Paper
Appears in Collections:MAGKS Joint Discussion Paper Series in Economics, Universität Marburg

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