Munich Personal RePEc Archive

Explaining ECB and Fed interest rate correlation: Economic interdependence and optimal monetary policy

Mandler, Martin (2010): Explaining ECB and Fed interest rate correlation: Economic interdependence and optimal monetary policy.

[img]
Preview
PDF
MPRA_paper_25929.pdf

Download (398Kb) | Preview

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.

UB_LMU-Logo
MPRA is a RePEc service hosted by
the Munich University Library in Germany.