Conferences at Department of Economics, University of Toronto, RCEF 2012: Cities, Open Economies, and Public Policy

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Stabilization Effects of the Euro Area Monetary Policy

Michael Owyang, Tatevik Sekhposyan

Last modified: 2012-05-11


The primary objective of the European Central Bank is price stability for the Euro Area. The current economic problems in the Euro Area countries suggest that it is possible for monetary policy stabilization effects in the aggregate and member economies to differ. In addition, the effects might vary across countries. To address this issue, we first estimate a Euro Area policy interest rate rule in a flavor of a Taylor rule. We then assess the importance of the country-specific differentials from the aggregate for the central bank interest rate setting. Further, we incorporate the empirical findings in a theoretical framework, where the country-specific stabilization effects of the aggregate monetary policy are formalized. We show that within typical parameter values the “Taylor principle” is satisfied for the aggregate, yet it is not satisfied for the currency union as a whole suggesting a locally unstable equilibrium.

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