Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212132 
Year of Publication: 
2009
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 11/2009
Publisher: 
Bank of Finland, Helsinki
Abstract: 
This paper investigates the extent to which euro area monetary policy has responded to evolving economic conditions in individual member states as opposed to the euro area as a whole. Based on a forward-looking Taylor rule-type policy reaction function, we conduct counterfactual exercises that compare the monetary policy behaviour of the ECB under alternative hypothetical scenarios: (1) the euro member states make individual policy decisions, and (2) the ECB responds to the economic conditions of individual members. Stress measures are then constructed to evaluate the degree of divergence of member state economies under these two hypothetical scenarios. The results we obtain reflect the extent of heterogeneity among the national economies in the monetary union, indicating that euro area policy rates have been particularly close to the 'counterfactual' interest rates of the largest euro members and countries with similar economic conditions, namely Germany, Austria, Belgium and France.
Subjects: 
European Central Bank
monetary policy reaction
Taylor rule
counterfactual analysis
JEL: 
E52
C53
Persistent Identifier of the first edition: 
ISBN: 
978-952-462-505-0
Document Type: 
Working Paper

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