FRB: A Bivariate Model of Fed and ECB Main Policy Rates

International Finance Discussion Papers

A Bivariate Model of Fed and ECB Main Policy Rates
Chiara Scotti
2006-875 (September 2006)

Abstract: This paper studies when and by how much the Fed and the ECB change their target interest rates. I develop a new nonlinear bivariate framework, which allows for elaborate dynamics and potential interdependence between the two countries, as opposed to linear feedback rules, such as a Taylor rule, and I use a novel real-time data set. A Bayesian estimation approach is particularly well suited to the small data sample. Empirical results support synchronization between the central banks and non-zero correlation between mag- nitude shocks, but they do not support follower behavior. Institutional factors and inflation represent relevant variables for timing decisions of both banks. Inflation rates are important factors for magnitude decisions, while output plays a major role in US magnitude decisions.

Full paper (457 KB PDF) | Full paper (screen reader version)

Keywords
Monetary Policy, Copula, Hazard Probability, Bivariate Probit Models

PDF files: Adobe Acrobat Reader ZIP files: PKWARE

Home | IFDPs | List of 2006 IFDPs
Accessibility | Contact Us
Last update: December 20, 2006