A Bivariate Model of Federal Reserve and ECB Main Policy Rates

Chiara Scotti

20 citations0/0 files storedRePEc: Research Papers in Economics

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Monetary Policy and Economic Impact Global Financial Crisis and Policies Market Dynamics and Volatility

Abstract

This paper studies when and by how much the Federal Reserve and the European Central Bank change their target interest rates. I develop a new non-linear bivariate framework, which allows for elaborate dynamics and potential interdependence between the two countries, as opposed to linear feedback rules, such as a Taylor rule, and I use a novel real-time data set. Although the data sample is inherently small, through a Bayesian estimation approach, I find some evidence in favor of timing synchronization between central banks and against the hypothesis of follower behaviors. Results for the magnitude model support zero correlation in the size of the target rate changes. Institutional factors and inflation represent relevant variables for both timing and magnitude decisions, while output plays a secondary role.

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References

1998Autoregressive Conditional Duration: A New Model for Irregularly Spaced Transaction Data 2001Monetary Policy Rules Based on Real-Time Data 1998Bayesian Methods for Dynamic Multivariate Models 2001Evolving Post-World War II U.S. Inflation Dynamics 2002A Simple Framework for International Monetary Policy Analysis n.d.The econometrics of ultra-high frequency data /2000Loss function‐based evaluation of DSGE models 2007Do central banks respond to exchange rate movements? A structural investigation

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