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Article
Do National Economic Shocks Influence European Central Bank Interest-Rate Setting? The Impact of the Financial and Sovereign Debt Crises
Journal of Common Market Studies
  • Sharmila K. King, University of the Pacific
  • Florence Bouvet, Sonoma State University
Document Type
Article
Department
Economics
DOI
10.1111/jcms.12001
Publication Date
3-1-2013
Disciplines
Abstract
This article examines the relevance of national economic conditions for European Central Bank (ECB) interest rate setting and whether the financial and sovereign debt crises have made national divergences more relevant. Officially, the ECB sets policy for the eurozone and considers only eurozone data. However, economic shocks in one or more countries may warrant a deviation from this rule. Using real-time, forecast data, the authors estimate a modified Taylor rule incorporating two macroeconomic ‘national influence’ measures: first the difference between the median and the eurozone measures of inflation and real gross domestic product (GDP) growth, and then deviations of the measures of inflation and real GDP growth for the ‘core’ and ‘periphery’ countries from eurozone averages. Using rolling-window analysis to test the stability of parameter estimates, evidence is found that divergences in national data – notably developments in the periphery – from eurozone averages play an increasingly important role during the financial and sovereign debt crises.
Citation Information
Sharmila K. King and Florence Bouvet. "Do National Economic Shocks Influence European Central Bank Interest-Rate Setting? The Impact of the Financial and Sovereign Debt Crises" Journal of Common Market Studies Vol. 51 Iss. 2 (2013) p. 212 - 231 ISSN: 0021-9886
Available at: http://works.bepress.com/sharmila-king/21/