One Rule to Rule Them All? | Anton Meier Ebsen Jørgensen

Executive Summary

This project investigates whether a single Taylor-type monetary policy rule can adequately describe the ECB’s interest rate setting and whether such a rule can be optimal for heterogeneous euro area economies. Using two-step GMM estimation on quarterly data from 1999 to 2024, the analysis estimates backward-looking Taylor rules. The findings highlight significant Taylor principle violations and instability across sub-periods. By simulating synthetic national interest rates, the study reveals persistent cross-country asymmetries, especially between core and periphery economies, highlighting the limits of a 'one-size-fits-all' policy.

Research Questions

Does a single Taylor-type rule adequately describe ECB interest rate setting over the long run?

How stable is the ECB's policy reaction function across pre-crisis, crisis, and post-crisis periods?

What are the magnitudes of the interest rate gaps when aggregate policy is applied to heterogeneous national economic conditions?

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Strategic Signal

"You frame the central conflict immediately—the Euro's fundamental dilemma."

Content & Focus

Exploring the core vs. periphery divide. Why Taylor Rules serve as the natural benchmark for policy optimality and what this project aims to uncover regarding ECB neutrality.

Methodological Resources

Read Article (Part 1)

Technical Robustness & Reflection

Critical answers to methodological choices

Methodology

Model Framework

Backward-looking Taylor rule with interest rate smoothing.

Identification Strategy

Two-step Generalized Method of Moments (GMM) to account for endogeneity and autocorrelation.

Data & Frequency

Quarterly frequency (1999Q2–2024Q1) for the Euro area aggregate and selected member states.

Estimation Approach

Instrumental variables (IV) approach using lagged macro variables.

[ Transmission Pathway Diagram: Model Architecture ]

Empirical Findings

Taylor principle violations: The long-run coefficient for inflation is often found to be below unity in sub-period analyses.
Structural Instability: Significant shifts in coefficients between pre-crisis and post-GFC samples.
Financial Stability: Inclusion of credit growth and financial stress indicators improves model fit.
Heterogeneity: Aggregated policy often leads to pro-cyclical tendencies in specific member states.

Data & Tools

Sources

Eurostat, OECD Economic Outlook, ECB Statistical Data Warehouse.

Software

Stata (GMM estimation), Python (Visualization & Simulation).

Documentation

Download Thesis (PDF) Full Text • 2.4 MB

Suggested Citation

 Jørgensen, A. M. E. (2024). One Rule to Rule Them All? Asymmetric Effects of ECB Policy. Seminar Paper, University of Copenhagen. JEL: E52, E58, F45.

Policy Implications

Critiques the 'one-size-fits-all' framework, suggesting the need for stronger macroprudential tools to handle local imbalances.

Highlights the difficulty of ECB communication when aggregate stability hides significant national divergence.

Emphasizes the role of financial stability objectives in the de-facto reaction function of the ECB.

Policy Relevance Matrix

Analytical Transfer Score