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Differences in Interest Rate Policy at the ECB and the Fed: An Investigation with a Medium-Scale DSGE Model


  • We thank Raf Wouters for invaluable input and Stéphane 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 first author was visiting the ECB Directorate General Research. The views expressed are solely our own and do not necessarily reflect those of the European Central Bank or the Banque de France.


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.