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Lessons from the ECB Experience: Frankfurt Still Matters!

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Abstract

This paper compares the European Central Bank’s conduct of monetary policy (1999-2005) with that of the Bundesbank (after the German Unification: 1990-1998) in order to test the hypothesis of an ECB with “Bundesbank’s preferences” put forward in the theoretical literature (Alesina and Grilli 1993, Fatum 2006). Econometric tests and simulations based on monetary policy reaction functions show that the continuation of the former Bundesbank regime is supported by the data. Given this empirical evidence we discuss the lessons for future Monetary Unions stemming from the ECB experience.

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... Second, the existence of evidence in favor of an active smoothing behavior by the 1 See for example Coibion and Gorodnichenko (2011) and Söderlind, Söderström, and Vredin (2004) for the Fed; Gerlach-Kristen (2003), Gerdesmeier and Roffia (2004), Rotondi and Vaciago (2007) for the ECB and Doménech, Ledo, and Tanguas (2002), Belke and Polleit (2007) for both, the Fed and the ECB. 2 There are other justifications which also hold in the absence of forward-looking expectations, for example parameter uncertainty (see e.g. Sack, 2000) or data uncertainty (see e.g. ...
... His result is based on the sample 1980:1-2003:4, a quantification of the degree of smoothing is not presented. The papers cited above by Belke and Polleit (2007) and Rotondi and Vaciago (2007) use the data sample of 1999:1-2005:2. ...
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