Working Paper: CEPR ID: DP14090
Authors: Mrcia Pereira; Jos Tavares
Abstract: We propose a new method to estimate implicit country weights in the conduct of monetary policy by the European Central Bank (ECB). We estimate linear and non-linear Taylorrules for 11 countries in the pre-Euro period, and then use the estimated response to produce counterfactual reference interest rates for those same countries in the post-Euro period.The distance between counterfactual interest rates and the ECB’s reference rate providesan estimate of a country’s implicit weight in Euro area monetary policy, in which the sumof weights adds up to 1. The concept of monetary weight draws on that of monetary stress,initially proposed by Clarida, Gal´ı, and Gertler, 1998, and further developed by Sturm andWollmersh¨auser, 2008. Our results show that Germany, Belgium and the Netherlands arepersistently assigned the largest weights, whereas Greece and Ireland secure the smallest.This is especially so during the Sovereign Debt Crisis (SDC). The estimated country weightsincrease with the degree of co-movement between each country’s and Germany’s businesscycle.
Keywords: Taylor rule; counterfactual interest rates; monetary weights; aggregate supply and demand shocks
JEL Codes: E52; F15; F33; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| estimated response to monetary policy rules (C54) | derived weights (C29) |
| degree of comovement between each country's business cycle and that of Germany (F44) | estimated country weights (C51) |
| greater correlation of output gaps and supply shocks between member states and Germany (F41) | implicit weights (D91) |
| demand shocks (E39) | implicit weights (D91) |
| varying degrees of economic integration among member states (F15) | implicit weights assigned by the ECB (F33) |
| country size and economic integration (F15) | weights assigned to Germany, Belgium, and the Netherlands (N44) |
| country size and economic integration (F15) | weights assigned to Greece and Ireland (F34) |
| country size (population or GDP) (R12) | weights assigned to Germany and France (N14) |