NOTES DTUDES ET DE RECHERCHE

DIFFERENCES IN INTEREST RATE POLICY AT THE ECB AND THE FED: AN INVESTIGATION WITH A MEDIUM-SCALE DSGE MODEL
Jean-Guillaume Sahuc and Frank Smets September 2007 NER - R # 182

DIRECTION GNRALE DES TUDES ET DES RELATIONS INTERNATIONALES

DIRECTION GNRALE DES TUDES ET DES RELATIONS INTERNATIONALES

DIRECTION DE LA RECHERCHE

DIFFERENCES IN INTEREST RATE POLICY AT THE ECB AND THE FED: AN INVESTIGATION WITH A MEDIUM-SCALE DSGE MODEL
Jean-Guillaume Sahuc and Frank Smets September 2007 NER - R # 182

Les Notes d'tudes et de Recherche refltent les ides personnelles de leurs auteurs et n'expriment pas ncessairement la position de la Banque de France. Ce document est disponible sur le site internet de la Banque de France www.banque-france.fr . Working Papers reflect the opinions of the authors and do not necessarily express the views of the Banque de France. This document is available on the Banque de France Website www.banque-france.fr.

Dierences in Interest Rate Policy at the ECB and the Fed: An Investigation with a Medium-Scale DSGE Model
Jean-Guillaume Sahuc Frank Smets

We thank Raf Wouters for invaluable input and Stphane Moyen for insightful discussions. We are also

grateful to Andy Levin, Ken West (editor) and two anonymous referees. This paper has been written while the rst author was visiting the ECB Directorate General Research. The views expressed are solely our own and do not necessarily reect those of the European Central Bank or the Banque de France. Jean-Guillaume Sahuc is a Senior Economist at the Directorate Research of the Banque de France and is also aliated with Audencia Nantes School of Management (Email: jean-guillaume.sahuc@banquefrance.fr). Frank Smets is Deputy Director General at the Directorate General Research of the European Central Bank and is also aliated with CEPR and the University of Ghent (Email: frank.smets@ecb.int).

Abstract Using two estimated models for the euro area and the United States, this paper investigates whether the observed dierence in the amplitude of the interest rate cycle since 1999 in both areas is due to dierences in the estimated monetary policy reaction function, dierences in the structure of the economy or dierences in the size and nature of the shocks hitting both economies. The paper concludes that dierences in the type, size and persistence of shocks in both areas can largely explain the dierent interest rate setting. Keywords: Policy activism, DSGE model, interest rates, macroeconomic shocks. JEL classication: C51, E52, E58.

Rsum A laide de deux modles estims pour la zone euro et les Etats-Unis, ce papier tudie les sources des dirences observes de lamplitude des cycles de taux dintrt depuis 1999. Trois raisons sont mises en avant : les dirences dans les fonctions de ractions des autorits montaires, dans la structure de lconomie et dans la taille et la nature des chocs aectant les deux zones. Ce papier conclut que les volutions des taux dintrt sont principalement des aux dirences dans le type, la taille et la persistance des chocs dans chacune des zones. Mots-cls : Activisme, modle DSGE, taux dintrt, chocs macroconomiques. Classication JEL : C51, E52, E58.

Non-technical summary Since the introduction of the euro in January 1999, the European Central Bank (ECB) has moved its policy rate much less frequently than the Federal Reserve (Fed). Over the period from January 1999 to January 2006, the ECB has changed its main renancing rate 16 times, whereas the Fed has changed its target for the federal funds rate about twice as often. This has generated a debate about dierences in the degree of central bank activism on both sides of the Atlantic. In this paper, we investigate the source of this dierence using two New Keynesian Dynamic Stochastic General Equilibrium (DSGE) models for the euro area and the United States respectively. Using estimated DSGE models oers a number of advantages. First, conducting policy exercises in a micro-founded model alleviates the Lucas critique. The estimated deep parameters are likely to be more invariant to counterfactual changes in policy regimes. Second, the DSGE model structure allows to describe dierences in economic structure and their implications for the transmission of shocks. Third, using the DSGE model structure should facilitates the estimation of the policy rules by providing additional instruments. Within the context of our estimated DSGE models, there are three main reasons why actual interest rate decisions may dier across the Atlantic. A rst reason is dierences in the estimated policy instrument rule. Such dierences could reect dierences in the objectives, the monetary policy strategy or the institutional set-up of the two central banks. Also these dierences should be reected in dierences in the estimated policy rule. A second reason is that the structure of the euro area and US economies are dierent, which given the central banks objectives leads to dierent interest rate settings. In the face of similar shocks, this should aect the size of the interest rate changes required to maintain price stability. Similarly, the euro area economy may be more rigid in the face of economic shocks and therefore require a more cautious response of monetary policy to news. A nal reason for the dierent interest rate behaviour may be that the size and source of the shocks hitting both economies are dierent. The estimated structural models can be used to distinguish between those three possible sources of dierences in interest rate setting. The overall conclusion of the analysis is that dierences in the size and the persistence of the shocks hitting the two economies is the main driving force behind the dierent interest rate behaviour. While one can detect small dierences in the reaction functions and the structural parameters of the two economies, these are not suciently large to explain the dierent interest rate behaviour.

Rsum non technique Depuis lintroduction de leuro en janvier 1999, la Banque Centrale Europenne (BCE) a trs peu modi ses taux directeurs en comparaison de la Rserve fdrale amricaine. Il existerait ainsi une inertie apparemment plus forte de la politique montaire dans la zone euro quaux tats-Unis. Cette dirence a, par le pass, amen certains commentateurs critiquer laction de la BCE, la jugeant trop mesure et trop tardive (too little, too late). Nous cherchons dans ce papier analyser les sources de cette dirence en utilisant deux modles dquilibre gnral intertemporel stochastique (DSGE) pour la zone euro et les Etats-Unis. Apprhender une telle problmatique avec des modles DSGE ore de multiples avantages. Tout dabord, conduire des exercices de politique conomique dans un modle microfond permet de rpondre la critique de Lucas. Les paramtres structurels sont ici invariants aux changements de rgimes de politique. Ensuite, la structure mme dun modle DSGE permet de dcrire les dirences de la structure conomique et ses implications pour la transmission des chocs. Enn, un modle DSGE facilite lestimation des rgles de politique montaire en fournissant des instruments supplmentaires. Le cadre danalyse adopt ici met en avant trois raisons pour lesquelles les dcisions de taux dintrt peuvent direr travers lAtlantique. Une premire raison est ladoption de rgles montaires direntes, dcrivant des objectifs, des stratgies de politique montaire ou des cadres institutionnels propres chacune des deux institutions. Une seconde raison rside dans les dirences de structure des conomies europenne et amricaine (une rigidit plus ou moins importante sur les marchs du travail ou des biens et services par exemple). Une dernire explication est que lorigine et lampleur des chocs aectants les deux conomeis sont direntes. Les modles structurels estims ont ainsi lavantage de pouvoir distinguer entre ces trois possibles sources. La conclusion principale est que lapparente dirence dans le degr dinertie de la politique montaire entre la zone euro et les tats-Unis est la consquence dune dirence de chocs macroconomiques plutt que de structures conomiques ou de stratgies de politique montaire et, plus prcisment, la consquence du fait que les tats-Unis avaient subi des chocs de demande plus importants que la zone euro.

Introduction

Since the introduction of the euro in January 1999, the European Central Bank (ECB) has moved its policy rate much less frequently than the Federal Reserve (Fed). Over the period from January 1999 to January 2006, the ECB has changed its main renancing rate 16 times, whereas the Fed has changed its target for the federal funds rate about twice as often. This has generated a debate about dierences in the degree of central bank activism on both sides of the Atlantic. For example, Aghion, Cohen and Pisani-Ferry (2005) have criticised the ECB for not being responsive enough to changes in the economic cycle. Figure 1 compares short-term interest rates in the euro area and the United States and conrms that, while the correlation between US and euro area rates is very high, the amplitude of the interest rate cycle is much smaller in the euro area than in the United States. {Insert Figure 1} In this paper, we investigate the source of this dierence using two New Keynesian Dynamic Stochastic General Equilibrium (DSGE) models for the euro area and the United States respectively, estimated over the period 1985:1 to 2004:4. Using estimated DSGE models oers a number of advantages. First, conducting policy exercises in a micro-founded model alleviates the Lucas critique. The estimated deep parameters are likely to be more invariant to counterfactual changes in policy regimes. Second, the DSGE model structure allows to describe dierences in economic structure and their implications for the transmission of shocks. Third, using the DSGE model structure should facilitates the estimation of the policy rules by providing additional instruments. Within the context of our estimated DSGE models, there are three main reasons why actual interest rate decisions may dier across the Atlantic. A rst reason is dierences in the estimated policy instrument rule. Such dierences could reect dierences in the objectives, the monetary policy strategy or the institutional set-up of the two central banks. For example, the explicit dual mandate of the Federal Reserve may lead to a larger weight on the stabilisation of output around its sustainable path and a stronger response to developments in the output gap. This could in turn explain why policy rates move more strongly in response to the business cycle. Similarly, dierences in the size, the composition and the voting mechanism of the decision-making bodies (the Governing Council in the case of the ECB and the FOMC in the case of the Fed) may imply dierences in the speed with which policy rates respond to economic developments. Also these dierences should be reected in dierences in the estimated policy rule. A second reason is that the structure of the euro area

and US economies are dierent, which given the central banks objectives leads to dierent interest rate settings. For example, it could be that in the United States the interest rate sensitivity of various demand components is dierent from that in the euro area. In the face of similar shocks, this should aect the size of the interest rate changes required to maintain price stability. Similarly, the euro area economy may be more rigid in the face of economic shocks and therefore require a more cautious response of monetary policy to news. A nal reason for the dierent interest rate behaviour may be that the size and source of the shocks hitting both economies are dierent. For example, while the United States has experienced a boom in productivity growth since the late 1990s, productivity growth has slowed down quite considerably over the past decade in the euro area. The estimated structural models can be used to distinguish between those three possible sources of dierences in interest rate setting. The overall conclusion of the analysis is that dierences in the size and the persistence of the shocks hitting the two economies is the main driving force behind the dierent interest rate behaviour. While one can detect small dierences in the reaction functions and the structural parameters of the two economies, these are not suciently large to explain the dierent interest rate behaviour.1 The main features of the structural macroeconometric model are described in Section 2. Section 3 focuses on dierences in the reaction function. Next, Section 4 and 5 analyze the role of dierences in the economic structure and in the sources of shocks respectively. Finally, Section 6 takes a more normative perspective and asks whether dierences in structure and shocks implied a dierent behaviour of the natural real interest rate.

The medium-scale macroeconometric model

In this section we briey describe the macroeconometric model we will use in the subsequent analysis.2 Households maximise a non-separable utility function in consumption and labour eort over an innite life horizon. Consumption appears in the utility function relative to a time-varying external habit variable that depends on past aggregate consumption. Each household provides dierentiated labour inputs. Monopoly power in the labour market results in an explicit wage equation and allows for the introduction of sticky nominal wages as in the Calvo model (households are allowed to reset their wage each period with an exogenous probability). Households rent capital services to rms and decide how much capital to accumulate given certain costs of adjusting the capital stock. The introduction of variable capital utilisation implies that as the rental price of capital changes, the capital stock can be

used more or less intensively according to some cost schedule. Firms produce dierentiated goods, decide on labour and capital inputs, and set prices according to the Calvo model. The Calvo model in both wage and price setting is augmented by the assumption that prices that are not re-optimised in a given period are partially indexed to past ination rates. Prices are therefore set in function of current and expected marginal costs, but are also determined by the past ination rate. The marginal cost of production depends on the wage and the rental rate of capital. Similarly, wages also depend on past and expected future wages and ination. Finally, the model is closed with a generalised Taylor-type rule, where the interest rate is set in function of the ination and the theoretically consistent output-gap (output in deviation from the ecient exible-price level of output). In what follows, we briey describe the log-linearised version of the model. The consumption equation:

ct =

h 1 1h ct1 + Et ct+1 (rt Et t+1 ) 1+h 1+h (1 + h) c c 1 (lt Et lt+1 ) + b + t c (1 + w ) (1 + h)

(1)

Consumption ct depends on a weighted average of past and expected future consumption, the ex-ante real interest rate (rt Et t+1 ) , expected employment growth (lt Et lt+1 ) and and lies between zero and one. c is the inverse of the intertemporal degree of substitution. The investment equation: 1 1/ (2) it1 + Et it+1 + qt + i t 1+ 1+ 1+ Investment it depends on past and expected future investment, the value of the existing it = capital stock qt and an investment-specic technology process i . is the rate of time t preference and is a parameter related to the elasticity of the investment adjustment costs. The Q equation: 1 rk k Et qt+1 (rt Et t+1 ) + Et rt+1 (3) 1 + rk 1 + rk The value of the capital stock depends negatively on the ex-ante real interest rate, and qt =
k positively on its expected future value, the expected rental rate rt+1 . stands for the de preciation rate and rk for the steady-state rental rate of capital so that = 1/ 1 + rk .

a preference shock b . h captures the degree of external habit formation in consumption t

The capital accumulation equation: kt = (1 ) kt1 + it1 + i t1 The capital stock kt depreciates with a rate . The ination equation: i p 1 p 1 p h k rt + (1 ) wt a + p (5) t = t1 + Et t+1 + t t 1 + p 1 + p p 1 + p (4)

Ination t depends on past and expected future ination and on the current marginal cost, which itself is a function of the rental rate on capital, the real wage wt and a productivity shock a . 1 p is the probability that prices can be reset in a given period while p is t the degree of indexation of prices to past ination. p is the shock in the price markup. t The real wage equation: 1 1 + w wt1 + Et wt+1 + w t1 t + Et t+1 1+ 1+ 1+ 1+ 1+ w (1 w ) (1 w ) c (ct hct1 ) + w wt l lt t (1 + ) (w + (1 + w ) l ) w 1h

wt =

(6)

The real wage wt is a function of expected and past real wages and the expected, current and past ination rate where the relative weight depends on the degree of indexation w to lagged ination to the non optimised wages. (1 w ) is the probability that wages can be reset in a given period, while w is the degree of indexation of wages to past ination. w represents the demand elasticity for labour and l is the inverse elasticity of labour supply. w is the shock in the wage markup. t The labour demand equation:
k lt = wt + (1 + ) rt + kt1

(7)

Labour demand lt depends negatively on the real wage (with a unit elasticity) and positively on the rental rate of capital and last periods capital stock. is the inverse of the elasticity of the capital utilisation cost function. The goods market equilibrium condition:

k yt = (1 ky gy ) ct + ky it + g + rk ky rt t k = a + kt1 + rt + (1 ) lt t

(8)

where ky is the steady state capital-output ratio, gy the steady-state government spendingoutput ratio and is one plus the share of the xed cost in production. g captures a t government spending shock. The monetary policy reaction function: n rt = rt1 + (1 ) r t1 + ry yt1 yt1 + r t
n +ry (yt yt ) + r t

(9)

The monetary authorities follow a generalised Taylor-type rule by gradually responding to lagged ination and the lagged output gap, dened as the dierence between actual yt
n and natural output yt .3 The degree of interest rate smoothing is captured by the parameter

. In addition, policy rates also respond to current changes in ination and the output gap. Finally, we assume that there is an interest rate shock r . t {Insert Figure 2} The model contains seven identied exogenous driving forces, which are assumed to be orthogonal to each other.4 We assume that all exogenous disturbances follow AR(1) processes: = + ,t , = a, b, g, i, r, with the exception of the price and wage t t1 mark-up disturbances which follow an ARMA(1,1) process. The latter assumption allows us to better capture the high-frequency uctuations in ination and real wages. We employ Bayesian methods to estimate the log-linearised models, using quarterly euro area and US data over the period 1985:1 through 2004:4. The euro area data come from the AWM database compiled by Fagan, Henry and Mestre (2005), and the US data come from the FREDII database. In particular, we treat seven aggregate variables as directly observed: real consumption growth, real investment growth, real GDP growth, real wages growth, hours worked, GDP price ination, and the short-run interest rate.5 In order to avoid having to choose a particular detrending method (linear, quadratic, or HP-lter), we use rst-dierenced real variables. The data used are shown in Figure 2. The prior distribution is summarized in Table 1 and discussed in more details in Smets and Wouters (2003, 2005). The discount factor is set at 0.99, the quarterly depreciation rate is set at 0.025, the area and 0.67 (resp. 0.16) for the United States. The capital-income share in the production and the 5 and 95 percent condence set of all the structural parameters.6 {Insert Table 1} 9 share of consumption (1 ky gy ) (resp. investment, ky ) is 0.57 (resp. 0.21) for the euro

function, is set at 0.29 for the EA and 0.24 for the US. Table 1 also contains the median

The role of the reaction function

In this section we rst focus on the estimated reaction function in the euro area and the United States. We then investigate whether dierences in the reaction function can account for the dierent interest rate behaviour. The lower section of Table 1 compares the fullsample estimation results of the parameters in the monetary policy reaction function. A few dierences are worth noting. First, it does turn out that the degree of interest rate smoothing is higher in the euro area than in the United States. The interest-rate-smoothing parameter is 0.87 in the euro area compared to 0.82 in the United States. This implies that on average it takes almost two years for the euro area interest rate to adjust to the target rate, while the corresponding period is ve and a half quarters for the US rate. In addition, the persistence of the monetary policy shocks is estimated to be somewhat higher in the euro area (0.55) compared to the US (0.46). Second, the response to ination is estimated to be lower in the euro area both in the short and the long run, while the response to the output gap is marginally stronger. The latter dierence is, however, not signicant. Of course, one may argue that the estimated reaction function is not representative of the ECBs behaviour as the ECB only started operations in 1999. One way of assessing whether this is indeed the case is by investigating whether the monetary policy shocks were larger and more systematic in the last six years of the sample. Figure 3 plots the actual short-term interest rate in the euro area and its counterfactual path when the monetary policy shocks (i.e. the residuals to the reaction function or the non-systematic part of monetary policy behaviour) are put equal to zero since 1999. It is immediately clear that both paths are very similar, suggesting that the ECBs behaviour since the start of EMU in 1999 is not very dierent from the average estimated behaviour over the longer sample period from 1985 till 2004. Overall, interest rate setting over the EMU period appears to have been somewhat looser than suggested by the estimated reaction function, but the deviations are generally small and approximately zero towards the end of 2004. {Insert Figure 3} Are the dierences in estimated reaction coecients reported above large enough to account for the dierent interest rate behaviour since 1999? Figure 4 provides an answer by comparing the actual euro area interest rate path with the counterfactual path that would have prevailed if the ECB had followed the reaction function estimated for the Fed. In this case, both the shocks and the structure of the economy are the ones estimated for the euro area, but the euro areas reaction function is replaced by the one estimated for the US

10

economy. Figure 4 makes clear that dierences in the estimated reaction function can not explain the less activist behaviour of the ECB. In contrast, it is interesting to note that under the Feds reaction function, the short-term interest rate would, if anything, have been even atter. In this exercise, the rate would have fallen by less since its peak at the end of 2000 and as a result would have been about 1 percentage point higher towards the end of the sample. The main reason for this appears to be the stronger response to ination in the Feds estimated reaction function. As a result, the interest rate gap starts opening up in 2001 when the euro area is hit by a number of positive cost-push shocks pushing up ination. {Insert Figure 4} One preliminary conclusion is therefore that dierences in policy behaviour do not appear to have played an important role in explaining the dierent interest rate setting. At this stage, it is however worth mentioning a major caveat. The estimated reaction coecients not only reect dierences in the objectives of the central bank, but may also reect dierences in the structure of the economy and the sources of the shocks. Using reduced-form reaction functions it is impossible to distinguish between both. It would be possible, if central bank behaviour was modelled as minimising an explicit loss function. We leave this for future research. We now turn to the role of structure and shocks.

The role of economic structure

The comparison of the estimates of the structural parameters (such as the intertemporal elasticity of substitution) of the economy in both areas conrms previous conclusion that it is dicult to detect signicant dierences between the two areas (Smets and Wouters, 2005). Overall, the estimates are quite similar but the euro area economy appears to be a bit more rigid. The most signicant dierences concern the habit formation parameter and the probability of price stickiness. The habit formation parameter is estimated to be 0.71 in the euro area and 0.63 in the United States. However, when this is translated in the reduced-form coecient on lagged consumption in the consumption equation (see equation (1)), this dierence translates into a dierence of only 0.03. The implied estimated coecient on lagged consumption is 0.41 in the euro area and 0.38 in the United States. The higher estimated degree of price stickiness in the euro area is consistent with the evidence reported in Altissimo, Ehrmann and Smets (2006), which summarizes the evidence on price stickiness at the micro level from the Eurosystems Ination Persistence Network. It translates in a 11

signicantly lower estimate of the slope of the New Keynesian Phillips curve in the euro area (0.008 versus 0.012). Altissimo et al. (2006) argue that a higher degree of price stickiness can imply a less agressive response of monetary policy to cost-push shocks for two reasons. First, with a high price stickiness a given change in the nominal interest rate will result in a larger change in the real rate and will therefore have a larger eect on output. Second, with higher price stickiness a credible central bank has a greater incentive to smooth out its policy response. {Insert Figure 5} In order to illustrate the impact of the estimated dierences in structural parameters, Figure 5 shows the response of output, ination and the nominal interest rate to a monetary policy shock in two counterfactual cases and compares them with the benchmark case of the estimated euro area model. In the rst case, the two structural parameters discussed above are replaced by their US counterparts. In the second case, all structural parameters are replaced by the US estimates. Both cases basically give the same results. It is clear that the less rigid structure of the US economy implies a stronger response of output and ination to a monetary policy shock. Similar behaviour prevails in response to other shocks. {Insert Figure 6} These dierences are, however, quite small. As a result, it is unlikely that they can explain the dierent interest rate behaviour. Figure 6 conrms this conjecture. It plots the counterfactual euro area interest rate if the structural parameters of the euro area economy were identical to those of the US economy, keeping the policy reaction function and the source of the shocks the same. It is dicult to see any dierence in the implied interest rate setting.

The role of shocks

Finally, given that dierences in neither the reaction function nor economic structure appear to provide a convincing argument for the dierent policy behaviour, it remains that the size and the source of the shocks to the economy must be an important factor. This is indeed what is shown in Figure 7. In this counterfactual exercise, the stochastic process governing the structural shocks are changed to that estimated for the US economy. As a result, the counterfactual euro area interest rate comes close to the actual path observed for the federal funds rate. Remaining dierences are mostly due to the dierent starting point and the dierent reaction function. 12

{Insert Figure 7} It is therefore worthwhile to investigate somewhat deeper the estimated sources of the shocks. Figure 8 plots a four-quarter moving sum of each of the seven estimated shocks in the euro area and the United States. Figure 9 shows a historical decomposition of the euro area and US annual growth rates, GDP ination and nominal interest rate. {Insert Figure 8} A number of interesting ndings can be highlighted. Let us rst focus on the developments in annual output growth (rst row of Figure 9). First of all, on average supply developments were less favourable in the euro area than in the US.7 In the US, total factor productivity developments were signicantly positive during most of the period since the beginning of 2001, whereas in the euro area no such positive developments can be detected. Moreover, the euro area was hit by more signicant positive price mark-up shock (corresponding to the increase in food and oil prices) in the 2001-2002 period, implying a negative impact on output. This development is partly oset by a persistently positive development in the euro area labour market. The wage mark-up is systematically below what could be expected based on the fundamentals of the economy. Overall, this contributes to a negative contribution of supply shocks to euro area growth in 2000 and 2001 and a positive contribution of supply shocks to US growth primarily since 2001. Second, as is clear from Figure 9 most of the short-term variations (and in particularly the rst recession of the millennium) appears to be due to demand shocks (consumption, investment and government spending shocks). From Figure 8, the high comovement of particularly the consumption and investment shocks in the euro area and the US is striking. At the same time, it is clear that the contribution of those shocks was larger in the US, explaining the deeper recession in the United States. Finally, it is interesting to see that also the monetary policy shocks appear to be highly correlated. In particular, both the Fed and the ECB appeared to lean against the recession by easing monetary policy by more than has usually been the case. {Insert Figure 9} Turning to ination developments, it is clear that most of the short-term variations are driven by the supply shocks and, in particular, the price mark-up shocks. In addition to changes in prot margins, the price mark-up shocks may reect a number of other factors including changes in volatile prices such as food and energy and changes in ination expectations due to learning or imperfect credibility. The contribution of the demand shocks to 13

ination is more pronounced in the US than in the euro area consistent with the nding of higher price stickiness in the euro area. In both areas the contribution of monetary policy to ination was positive over the 1999-2004 period. Finally, the lower panel of Figure 9 shows that most of the dierence in policy behaviour between the ECB and the Fed is due to the dierence in demand shocks. While those shocks appear to be highly correlated across the two areas, they were larger in the United States. Overall, this appears to be the most important reason for why the amplitude of the US short-term interest rate cycle was greater than that of the euro area rate.8

Comparing the development in the natural real interest rate

Up to now, we have taken the estimated reaction functions as given. While this may be useful as a description of actual policy behaviour, it is also interesting to take a more normative perspective. One tool for doing so is to compute the exible-price-and-wage level of the real interest rate. Figure 10 compares the evolution of the actual and natural real rate in the euro area and the US using the lens of the New Keynesian models. In the euro area, the actual estimated real interest rate has fallen from its peak close to 4% in the last quarter of 2000 to a level somewhat below 2% at the end of 2004. In the United States, in contrast, the fall in the actual estimated real rate has been more prominent and is estimated to be zero at the end of 2004. The natural rate broadly followed the same pattern as the actual real rate (rising during the 1999-2000 period and falling since then), but it is more volatile than the actual rate. In both currency areas, the natural real rate is higher than the actual rate in 1999 and 2000 and falls below the actual real rate from 2001 onward. The volatility of the natural real rate is higher in the United States compared to the euro area. In particular, what stands out is the large drop in the natural real rate during 2001. This drop is almost twice as high in the United States compared to the euro area and corresponds to large negative investment (and to a less extent consumption) shocks noted in this period. Towards the end of the sample period, the gap between the estimated actual and natural rates appears to be closed. {Insert Figure 10} What shocks drive this gap? Figure 11 presents a historical decomposition of the real interest rate gap over the EMU period. In both areas, monetary policy shocks have contributed to closing the gap. In the euro area demand developments appear to play a relatively more 14

important role than supply developments. In the United States both contributed to the negative gap before 2000 and the positive gap after 2000. {Insert Figure 11}

Conclusion

In this paper, we run counterfactual exercises using DSGE models of the euro area and the United States to explore various explanations for the dierent interest rate policies implemented by the ECB and the Fed. We show that the dierences in the type, size and persistence of exogenous shocks can largely explain the dierent interest rate setting in the euro area relative to the U.S. responses. We treated the United States and the euro area as closed economies. An interesting extension would be to perform a similar exercises in a two-country model that allows for common shocks and interaction between the two central banks.

References
[1] Aghion, Philippe, Elie Cohen, and Jean Pisani-Ferry. (2005) Politiques Economiques et Croissance en Europe, report to the French Council of Economic Analysis, Paris: La Documentation Franaise. [2] Altissimo, Filippo, Michael Ehrmann, and Frank Smets. (2006) Ination Persistence and Price Setting Behaviour in the Euro Area: A Summary of the IPN Evidence. ECB Occasional Paper 46, European Central Bank. [3] Christiano, Lauwrence, Roberto Motto, and Massimo Rostagno (2005) Financial Factors in Business Cycles. mimeo, European Central Bank. [4] Fagan, Gabriel, Jrme Henry, and Ricardo Mestre (2005), An Area-Wide Model (AWM) for the Euro Area. Economic Modelling, 22, 39-59. [5] Smets, Frank and Rafael Wouters (2003) An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area. Journal of the European Economic Association, 1, 1123-1175. [6] Smets, Frank and Rafael Wouters (2005) Comparing Shocks and Frictions in US and Euro Area Business Cycles: A Bayesian DSGE Approach. Journal of Applied Econometrics, 20, 161-183. 15

Notes
1A

similar exercise focusing on explaining dierences in growth rates in the euro area

and the United States is performed in Christiano, Motto and Rostagno (2005).
2 It

is a slightly modied version of the structural models presented in Smets and Wouters

(2003, 2005). The main dierence is that the number of shocks has been reduced to seven to match the number of observed variables in estimation.
3 Natural

output (or the target level of output for the central bank) is dened as the

counterfactual level of output that would prevail under exible prices and wages. When calculating the target level of output we assume that the price and wage mark-up shocks do not aect potential output. Alternative assumptions imply a deterioration of the empirical t of the model. For example, assuming that the wage mark-up shock is a labour supply shock and does aect the target level of output leads to a deterioration of the marginal likelihood by about thirty points in both areas.
4 In

contrast to Smets and Wouters (2003, 2005), the estimated model no longer contains

an equity premium shock, a labour supply shock and an ination target shock. The equity premium and ination target shock turned out to be unimportant for the empirical performance of the model. As a result, it is assumed the central bank pursues a constant ination objective. The labour supply and wage mark-up shock are combined in one more general wage mark-up disturbance.
5 Following

Smets and Wouters (2003), an ad-hoc Calvo-type employment adjustment

equation is used for the euro area to translate hours worked into the employment series used in estimation.
6A

technical appendix available upon request contains further details of the estimated

models and their t. Smets and Wouters (2003) show that the models forecasting performance compares relatively well with that of VARs.
7 The

supply developments capture the eects of three supply shocks: the total factor

productivity shock, the price mark-up shock and the wage mark-up shock. These are called supply shocks because they lead to opposite movements in output and ination.
8A

technical appendix available upon request shows that these ndings are robust to

changes in the estimated parameters due to looser priors on the auxiliary parameters of the shock processes, to dierent denitions of the output gap in the policy rule and to the re-introduction of an ination target shock in the policy rule.

16

Table 1. Prior and Posterior Distribution for the Parameters (1985:1-2004:4) Posterior Distribution

17

productivity shock preference shock government spending shock investment shock monetary policy shock price markup shock wage markup shock productivity shock preference shock government spending shock investment shock monetary policy shock price markup shock wage equation shock price markup shock wage equation shock investment shock Capital adjustment cost consumption utility labour desutility h consumption habit w Calvo wages Calvo prices Indexation wages Indexation prices Calvo employment Utilisation rate inv. elasticity Fixed costs Cste. inflation Cste. Interest rate Cste. Labour Trend lagged interest rate inflation d(inflation) output gap d(output gap)

Prior Distribution Type Mean inverse gamma 0.250 inverse gamma 0.250 inverse gamma 0.250 inverse gamma 0.250 inverse gamma 0.250 inverse gamma 0.250 inverse gamma 0.250 beta 0.750 beta 0.750 beta 0.750 beta 0.750 beta 0.750 beta 0.750 beta 0.750 beta 0.750 beta 0.750 beta 0.750 normal 5.000 normal 1.000 normal 2.000 beta 0.700 normal 0.500 beta 0.750 beta 0.750 beta 0.500 beta 0.500 beta 0.500 normal 0.200 normal 1.250 normal 0.600 normal 0.600 normal 0.100 normal 0.400 beta 0.750 normal 1.500 normal 0.250 normal 0.125 normal 0.125 S.E. 2.000 2.000 2.000 2.000 2.000 2.000 2.000 0.150 0.150 0.150 0.150 0.150 0.150 0.150 0.150 0.150 0.150 2.000 0.375 0.500 0.100 0.150 0.050 0.050 0.150 0.150 0.150 0.100 0.125 0.100 0.100 0.100 0.100 0.100 0.250 0.100 0.050 0.050 5% 0.427 0.067 0.289 0.484 0.099 0.093 0.116 0.930 0.552 0.956 0.759 0.419 0.766 0.956 0.567 0.798 0.614 5.675 0.846 1.425 0.606 0.230 0.709 0.872 0.206 0.090 0.684 0.298 1.282 0.466 0.523 -0.032 0.210 0.817 1.186 0.045 0.018 0.130 95% 0.651 0.140 0.375 0.681 0.141 0.159 0.182 0.997 0.828 1.000 0.978 0.687 0.969 0.997 0.892 0.932 0.924 10.680 1.606 2.948 0.821 0.766 0.850 0.956 0.628 0.357 0.772 0.575 1.621 0.797 0.783 0.089 0.430 0.933 1.859 0.194 0.134 0.240 5% 0.357 0.064 0.389 0.233 0.089 0.091 0.187 0.864 0.435 0.958 0.642 0.317 0.753 0.711 0.556 0.505 4.930 0.876 1.619 0.500 0.234 0.681 0.846 0.187 0.117 0.240 1.326 0.454 0.482 -1.183 0.401 0.768 1.531 0.095 -0.010 0.093 95% 0.466 0.152 0.504 0.394 0.122 0.141 0.295 0.979 0.837 0.997 0.853 0.606 0.977 0.950 0.883 0.854 9.928 1.652 3.099 0.764 0.722 0.833 0.924 0.654 0.474 0.523 1.654 0.704 0.721 1.366 0.499 0.865 2.170 0.246 0.113 0.167

Euro Area Median 0.536 0.103 0.334 0.576 0.120 0.127 0.147 0.962 0.690 0.981 0.869 0.555 0.866 0.978 0.728 0.865 0.773 8.301 1.231 2.204 0.707 0.499 0.772 0.912 0.405 0.229 0.723 0.440 1.462 0.635 0.646 0.027 0.315 0.869 1.529 0.120 0.071 0.180

United States Median 0.412 0.104 0.450 0.316 0.105 0.125 0.244 0.920 0.658 0.977 0.743 0.459 0.842 0.821 0.757 0.668 7.691 1.282 2.361 0.629 0.486 0.760 0.887 0.425 0.307 0.376 1.484 0.580 0.595 0.137 0.452 0.818 1.831 0.162 0.064 0.131

% 4.00 5.00 6.00 7.00

0.00

1.00

2.00

3.00

Euro area

Figure 1. Short-term interest rates in the euro area and the United States

18
United States

19 99 Q 19 1 99 Q 19 2 99 Q 19 3 99 Q 20 4 00 Q 20 1 00 Q 20 2 00 Q 20 3 00 Q 20 4 01 Q 20 1 01 Q 20 2 01 Q 20 3 01 Q 20 4 02 Q 20 1 02 Q 20 2 02 Q 20 3 02 Q 20 4 03 Q 20 1 03 Q 20 2 03 Q 20 3 03 Q 20 4 04 Q 20 1 04 Q 20 2 04 Q 20 3 04 Q 4

Figure 2. Data

19

-6.00

-4.00

-2.00

-1.50

-1.00

-0.50

-2.00

-1.50

-1.00

-0.50

0.00

2.00

4.00

6.00

8.00

0.00

0.50

1.00

1.50

2.00

2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00

0.00

0.50

1.00

1.50

2.00

2.50

Euro area employment

Euro area

Euro area

Euro area

Consumption growth

Output growth

Inflation

Labour
United States

United States

United States

United States hours worked

19 85 19 Q1 86 19 Q1 87 19 Q1 88 19 Q1 89 19 Q1 90 19 Q1 91 19 Q1 92 19 Q1 93 19 Q1 94 19 Q1 95 19 Q1 96 19 Q1 97 19 Q1 98 19 Q1 99 20 Q1 00 20 Q1 01 20 Q1 02 20 Q1 03 20 Q1 04 Q 1

19 85 19 Q1 86 19 Q1 87 19 Q1 88 19 Q1 89 19 Q1 90 19 Q1 91 19 Q1 92 19 Q1 93 19 Q1 94 19 Q1 95 19 Q1 96 19 Q1 97 19 Q1 98 19 Q1 99 20 Q1 00 20 Q1 01 20 Q1 02 20 Q1 03 20 Q1 04 Q 1
85 19 Q1 86 19 Q1 87 19 Q1 88 19 Q1 89 19 Q 1 90 19 Q1 91 19 Q1 92 19 Q 1 93 19 Q1 94 19 Q1 95 19 Q1 96 19 Q1 97 19 Q1 98 19 Q1 99 20 Q1 00 20 Q1 01 20 Q1 02 20 Q1 03 20 Q1 04 Q 1

19 85 1 9 Q1 86 1 9 Q1 87 1 9 Q1 88 1 9 Q1 89 1 9 Q1 90 1 9 Q1 91 19 Q1 92 19 Q1 93 1 9 Q1 94 1 9 Q1 95 1 9 Q1 96 1 9 Q1 97 1 9 Q1 98 1 9 Q1 99 2 0 Q1 00 20 Q1 01 20 Q1 02 2 0 Q1 03 2 0 Q1 04 Q 1

19
-1.50 0.00 0.50 1.00 1.50 -1.00 -0.50 2.00 2.50 3.00

5.00 4.00 3.00 2.00 1.00 0.00 -1.00 -2.00 -3.00 -4.00 -5.00

0.00
Euro area

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Investment growth

Euro area

Euro area

Wage growth

Interest rate

United States

United States

United States

19 85 19 Q1 86 19 Q1 87 19 Q1 88 19 Q1 89 19 Q1 90 19 Q1 91 19 Q1 92 19 Q1 93 19 Q1 94 19 Q1 95 19 Q1 96 19 Q1 97 19 Q1 98 19 Q1 99 20 Q1 00 20 Q1 01 20 Q1 02 20 Q1 03 20 Q1 04 Q 1

19 85 19 Q1 86 19 Q1 87 19 Q1 88 19 Q1 89 19 Q1 90 19 Q1 91 19 Q1 92 19 Q1 93 19 Q1 94 19 Q1 95 19 Q1 96 19 Q1 97 19 Q1 98 19 Q1 99 20 Q1 00 20 Q1 01 20 Q1 02 20 Q1 03 20 Q1 04 Q 1

19 85 19 Q1 86 19 Q1 87 19 Q1 88 19 Q1 89 19 Q1 90 19 Q1 91 19 Q1 92 19 Q1 93 19 Q1 94 19 Q1 95 19 Q1 96 19 Q1 97 19 Q1 98 19 Q1 99 20 Q1 00 20 Q1 01 20 Q1 02 20 Q1 03 20 Q1 04 Q 1

% 2.00 3.00 4.00 5.00 6.00 7.00 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00

Feds reaction function

monetary policy shocks

0.00

1.00

19

19

with monetary policy shocks

data

Figure 4. Counterfactual euro area interest rate setting with the

Figure 3. The ECB interest rate setting with and without estimated

with Fed's reaction function

20
without monetary policy shocks Fed funds

Fed funds

99 19 Q 1 99 19 Q 2 99 19 Q 3 99 20 Q 4 00 20 Q 1 00 20 Q 2 00 20 Q 3 00 20 Q 4 01 20 Q 1 01 20 Q 2 01 20 Q 3 01 20 Q 4 02 20 Q 1 02 20 Q 2 02 20 Q 3 02 20 Q 4 03 20 Q 1 03 20 Q 2 03 20 Q 3 03 20 Q 4 04 20 Q 1 04 20 Q 2 04 20 Q 3 04 Q 4

99 19 Q 1 99 19 Q 2 99 19 Q 3 99 20 Q 4 00 20 Q 1 00 20 Q 2 00 20 Q 3 00 20 Q 4 01 20 Q 1 01 20 Q 2 01 20 Q 3 01 20 Q 4 02 20 Q 1 02 20 Q 2 02 20 Q 3 02 20 Q 4 03 20 Q 1 03 20 Q 2 03 20 Q 3 03 20 Q 4 04 20 Q 1 04 20 Q 2 04 20 Q 3 04 Q 4

Figure 5. Monetary policy transmission with US structural parameters

Output
0.20 0.00 -0.20 -0.40 -0.60 -0.80 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 basis case 1 case 2
0.02 0 -0.02 -0.04 -0.06 -0.08 -0.1 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 basis case 1 case 2

Inflation

Interest rate
0.1 0.08 0.06 0.04 0.02 0 -0.02 -0.04 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 basis case 1 case 2

Figure 6. Counterfactual euro area interest rate setting with US structural parameters
7.00 6.00 5.00 4.00 % 3.00 2.00 1.00 0.00
19 99 1 9 Q1 99 1 9 Q2 99 1 9 Q3 99 2 0 Q4 00 2 0 Q1 00 2 0 Q2 00 2 0 Q3 00 2 0 Q4 01 2 0 Q1 01 2 0 Q2 01 2 0 Q3 01 2 0 Q4 02 2 0 Q1 02 2 0 Q2 02 2 0 Q3 02 2 0 Q4 03 2 0 Q1 03 2 0 Q2 03 2 0 Q3 03 2 0 Q4 04 2 0 Q1 04 2 0 Q2 04 2 0 Q3 04 Q 4

data

with US structural parameters

Fed funds

21

% 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00

data

Figure 7. Counterfactual euro area interest rate setting with US shocks

with US shocks

22
Fed funds

19 99 19 Q 1 99 19 Q 2 99 19 Q 3 99 20 Q 4 00 20 Q 1 00 20 Q 2 00 20 Q3 00 20 Q 4 01 20 Q1 01 20 Q 2 01 20 Q3 01 20 Q 4 02 20 Q 1 02 20 Q 2 02 20 Q 3 02 20 Q 4 03 20 Q 1 03 20 Q 2 03 20 Q 3 03 20 Q4 04 20 Q 1 04 20 Q2 04 20 Q 3 04 Q 4

Figure 8. Estimated shocks in the euro area and the US (1999-2004)

Productivity
2.50 2.00 1.50 1.00 0.50 0.00 -0.50 -1.00 -1.50 -2.00 -2.50
0.40 0.30 0.20 0.10 0.00 -0.10 -0.20 -0.30 -0.40

Preference

Euro Area

United States

Std. Dev. (EA)

Std. Dev. (US)

Government Spending
2.00 1.50 1.00 0.50 0.00 -0.50 -1.00 -1.50 -2.00 -2.50
1.50 1.00 0.50 0.00 -0.50 -1.00 -1.50 -2.00 -2.50

19 99 Q 1 19 99 Q 3 20 00 Q 1 20 00 Q 3 20 01 Q 1 20 01 Q 3 20 02 Q 1 20 02 Q 3 20 03 Q 1 20 03 Q 3 20 04 Q 1 20 04 Q 3

Euro Area

United States

Std. Dev. (EA)

Std. Dev. (US)

Price Markup
0.60 0.50 0.40 0.30 0.20 0.10 0.00 -0.10 -0.20 -0.30 -0.40

-0.10 -0.20 -0.30 -0.40 -0.50 -0.60

1 3 1 3 1 3 1 3 1 3 1 20 04 Q 19 99 Q 19 99 Q 20 00 Q 20 00 Q 20 01 Q 20 02 Q 20 03 Q 20 03 Q 20 04 Q 20 01 Q 20 02 Q 3

19 99 Q 1 19 99 Q 3 20 00 Q 1 20 00 Q 3 20 01 Q 1 20 01 Q 3 20 02 Q 1 20 02 Q 3 20 03 Q 1 20 03 Q 3 20 04 Q 1 20 04 Q 3

Euro Area

United States

Std. Dev. (EA)

Std. Dev. (US)

Wage Markup
1.00 0.80 0.60 0.40 0.20 0.00 -0.20 -0.40 -0.60 -0.80

19 99 Q 1 19 99 Q 3 20 00 Q 1 20 00 Q 3 20 01 Q 1 20 01 Q 3 20 02 Q 1 20 02 Q 3 20 03 Q 1 20 03 Q 3 20 04 Q 1 20 04 Q 3

Euro Area

United States

Std. Dev. (EA)

Std. Dev. (US)

23

19 99 Q 1 19 99 Q 3 20 00 Q 1 20 00 Q 3 20 01 Q 1 20 01 Q 3 20 02 Q 1 20 02 Q 3 20 03 Q 1 20 03 Q 3 20 04 Q 1 20 04 Q 3
Euro Area United States Std. Dev. (EA) Std. Dev. (US)

19 99 Q 1 19 99 Q 3 20 00 Q 1 20 00 Q 3 20 01 Q 1 20 01 Q 3 20 02 Q 1 20 02 Q 3 20 03 Q 1 20 03 Q 3 20 04 Q 1 20 04 Q 3

19 99 Q

20 00 Q

19 99 Q

20 00 Q

20 01 Q

20 01 Q

20 02 Q

20 03 Q

20 04 Q

20 02 Q

20 03 Q

20 04 Q

Euro Area

United States

Std. Dev. (EA)

Std. Dev. (US)

Investment

Interest Rate
0.30 0.20 0.10 0.00

Euro Area

United States

Std. Dev. (EA)

Std. Dev. (US)

Figure 9. Historical decomposition of annual output growth, ination and interest rate in the EA and the US Annual output growth
Euro area
3.00 2.00 1.00 0.00 -1.00 -2.00 -3.00 -4.00
1 3 1 3 1 3 1 3 1 3 1 3 19 99 Q 19 99 Q 20 01 Q 20 01 Q 20 02 Q 20 03 Q 20 03 Q 20 04 Q 20 04 Q 20 00 Q 20 00 Q 20 02 Q
3.00 2.00 1.00 0.00 -1.00 -2.00 -3.00 -4.00
1 1 3 1 3 1 3 1 3 1 3 20 01 Q 20 02 Q 20 02 Q 19 99 Q 20 00 Q 20 01 Q 19 99 Q 20 00 Q 20 03 Q 20 03 Q 20 04 Q 20 04 Q 3

United States

Supply Shocks

Demand Shocks

Monetary Policy Shock

Output Growth

Supply Shocks

Demand Shocks

Monetary Policy Shock

Output Growth

Ination
Euro area
1.50 1.00 0.50 0.00 -0.50 -1.00 -1.50 -2.00
1.50 1.00 0.50 0.00 -0.50 -1.00 -1.50 -2.00

United States

Q 3

Q 1

Q 3

Q 1

Q 3

Q 1

Q 3

Q 1

Q 3

Q 1

Q 1 04 20 20

20 04 Q

19 99 Q

20 00 Q

20 01 Q

20 02 Q

20 02 Q

20 03 Q

20 03 Q

19 99 Q

20 00 Q

20 01 Q

20 04 Q

99

99

00

00

01

01

02

02

03

03

19

19

20

20

20

20

20

20

20

Supply Shocks

Demand Shocks

Monetary Policy Shock

Inflation

Supply Shocks

Demand Shocks

Monetary Policy Shock

20

Interest rate
Euro area
0.80 0.60 0.40 0.20 0.00 -0.20 -0.40 -0.60 -0.80 -1.00 -1.20

United States
0.80 0.60 0.40 0.20 0.00 -0.20 -0.40 -0.60 -0.80 -1.00 -1.20
3 1 3 3 1 3 1 3

04
Inflation

1 20 04 Q

20 00 Q

20 01 Q

20 01 Q

19 99 Q

19 99 Q

19 99 Q

19 99 Q

20 00 Q

20 00 Q

20 01 Q

20 01 Q

20 02 Q

20 02 Q

20 03 Q

20 03 Q

20 04 Q

20 04 Q

Supply Shocks

Demand Shocks

Monetary Policy Shock

Interest rate

Supply Shocks

20 00 Q

Demand Shocks

20 02 Q

Monetary Policy Shock

Interest rate

24

20 04 Q

20 02 Q

20 03 Q

20 03 Q

Q 3

Figure 10. Real interest rate in the EA and the US

Euro area
3.00 2.50 2.00 1.50 1.00 0.50 0.00 -0.50 -1.00 -1.50 -2.00
1 1 3 3 1 3 1 3 1 3 1 3 19 99 Q 19 99 Q 20 01 Q 20 00 Q 20 00 Q 20 01 Q 20 02 Q 20 02 Q 20 03 Q 20 03 Q 20 04 Q 20 04 Q

United States
3.00 2.50 2.00 1.50 1.00 0.50 0.00 -0.50 -1.00 -1.50 -2.00
1 3 1 3 1 3 1 3 1 3 1 20 04 Q 19 99 Q 19 99 Q 20 01 Q 20 00 Q 20 00 Q 20 01 Q 20 02 Q 20 02 Q 20 03 Q 20 03 Q 20 04 Q 3

Real Interest Rate

Natural Real Interest Rate

Nominal Interest Rate

Real Interest Rate

Natural Real Interest Rate

Nominal Interest Rate

Figure 11. Historical decomposition of real interest rate gap in the EA and the US
Euro area
2.00 1.50 1.00 0.50 0.00 -0.50 -1.00 -1.50 -2.00
3 1 1 1 1 3 1 3 3 1 3 3 9Q 0Q 2Q 4Q 9Q 1Q 1Q 19 9 20 0 20 0 3Q 0Q 2Q 3Q 20 0 20 0 19 9 20 0 20 0 20 0 20 0 20 0 20 0 4Q
2.00 1.50 1.00 0.50 0.00 -0.50 -1.00 -1.50 -2.00

United States

Supply Shocks Monetary Policy Shock

Demand Shocks Real Interest Rate Gap

25

19 99 Q 1 19 99 Q 3 20 00 Q 1 20 00 Q 3 20 01 Q 1 20 01 Q 3 20 02 Q 1 20 02 Q 3 20 03 Q 1 20 03 Q 3 20 04 Q 1 20 04 Q 3
Supply Shocks Monetary Policy Shock Demand Shocks Real Interest Rate Gap

Notes d'tudes et de Recherche

156. J.-S. Msonnier, The Reliability of Macroeconomic Forecasts based on Real Interest Rate Gap Estimates in Real Time: an Assessment for the Euro Area, October 2006. 157. O. de Bandt, C. Bruneau and W. El Amri, Convergence in Household Credit Demand across Euro Area Countries: Evidence from Panel Data, October 2006. 159. J. Idier, Stock December 2006. Exchanges Industry Consolidation and Shock Transmission,

160. E. Gautier, The Behaviour of Producer Prices: Some Evidence from the French PPI Micro Data, December 2006. 161. O. Loisel, Bubble-free interest-rate rules, December 2006. 162. J. Boivin and M. P. Giannoni, DSGE Models in a Data-Rich Environment, January 2007. 163. J. Coffinet, J. Matheron et C. Poilly, Une valuation structurelle du ratio de sacrifice dans la zone euro , janvier 2007. 164. P. Vermeulen, D. Dias, M. Dossche, E. Gautier, I. Hernando, R. Sabbatini and H. Stahl, Price setting in the euro area: Some stylised facts from Individual Producer Price Data, February 2007. 165. C. Bordes, L. Clerc and V. Marimoutou, Is there a structural break in equilibrium velocity in the euro area? February 2007. 166. D. Fougre, Les mthodes micro-conomtriques dvaluation , mars 2007. 167. C. Jardet and G. Le Fol, Euro money market interest rates dynamics and volatility: How they respond to recent changes in the operational framework, May 2007. 168. L. Clerc, Understanding asset prices: determinants and policy implications, May 2007. 169. F. Savignac, The impact of financial constraints on innovation: What can be learned from a direct measure?, June 2007. 170. J. Idier, C. Jardet and A. de Loubens, Determinants of long-term interest rates in the United States and the euro area: A multivariate approach, June 2007. 171. O. Darn et V. Brunhes-Lesage, LIndicateur Synthtique Mensuel dActivit (ISMA) : une rvision , Juillet 2007. 172. R. Kierzenkowski et V. Oung, Lvolution des crdits lhabitat en France : une grille danalyse en termes de cycles , Juillet 2007. 173. O. de Bandt, A. Banerjee and T. Koluk, Measuring Long-Run Exchange Rate PassThrough, July 2007. 174. J. Alho and V. Borgy, Global Ageing and Macroeconomic Consequences of Demographic Uncertainty in a Multi-regional Model, July 2007. 175. J.-S. Msonnier and J.-P. Renne, Does uncertainty make a time-varying natural rate of interest irrelevant for the conduct of monetary policy?, September 2007.

176. J. Idier and S. Nardelli, Probability of informed trading: an empirical application to the euro overnight market rate, September 2007. 177. H. Partouche, Time-Varying Coefficients in a GMM Framework: Estimation of a Forward Looking Taylor Rule for the Federal Reserve, September 2007. 178. C. Ewerhart and N. Valla, Financial Market Liquidity and the Lender of Last Resort, September 2007. 179. C. Ewerhart and N. Valla, Forced Portfolio Liquidation, September 2007. 180. P.-A. Beretti and G. Cette, Indirect ICT Investment, September 2007. 181. E. Jondeau and J.-G. Sahuc, Testing heterogeneity within the euro area, September 2007. 182. J.-G. Sahuc and Frank Smets, Differences in Interest Rate Policy at the ECB and the Fed: An Investigation with a Medium-Scale DSGE Model, September 2007.
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