Working Paper Series no. 182: Differences in Interest Rate Policy at the ECB and the Fed: An Investigation with a Medium-Scale DSGE Model

Abstract

Using two estimated models for the euro area and the United States, this paper investigates whether the observed difference in the amplitude of the interest rate cycle since 1999 in both areas is due to differences in the estimated monetary policy reaction function, differences in the structure of the economy or differences in the size and nature of the shocks hitting both economies. The paper concludes that differences in the type, size and persistence of shocks in both areas can largely explain the different interest rate setting.

Frank Smets and Jean-Guillaume Sahuc
September 2007

Classification JEL : C51, E52, E58.

Keywords : Policy activism, DSGE model, interest rates, macroeconomic shocks.