The asymmetric relationship between oil prices and activity in the EMU: Does the ECB monetary policy play a role?

Monetary policy is usually perceived as an important transmission channel in the negative relationship between oil prices and economic performance. It may also constitute a short-term explanation of the non-linearity in this relationship, since Central Bankers may be more sensitive to the potential inflationary threats entailed by high oil price increases than to small increases or decreases. In this paper, we use an extended Taylor rule to investigate the role of oil prices in the ECB monetary policy strategy. A contemporaneous reaction function is estimated using both a GMM framework and an Ordered Probit model, and several oil indicators are constructed and tested. The main results suggest that oil prices play a key role in the ECB interest-rate setting, since it appears as a relevant indicator of future inflation. However, the ECB seems to react asymmetrically: only oil price increases influence its decision setting, not oil prices decreases. Monetary policy may thus transmit and amplify the asymmetry in the relationship between oil prices and activity in the euro area. Further investigations suggest that a preference for price stability provides an important explanation of this asymmetric behaviour of the ECB.Oil prices ; Monetary policy ; Taylor rule ; Asymmetry ; ECB.

The role of oil prices in monetary policy rules: evidence from 4 major central banks

Recent movements in oil prices on international markets have generated many comments on the role that oil prices may play for Central Banks of oil-importing countries, oil price shocks being interpreted as supply shocks leading to higher inflation rates and lower economic growth. In this paper, we examine the role played by oil prices in the monetary policy strategy of 4 major Central Banks: the U.S. Federal Reserve, the ECB, the Bank of Canada and the Bank of England. Using an Ordered Probit model, we assess the reaction of each Central Bank to oil price changes and investigate a potential asymmetric response to oil price increases and decreases. Our results suggest that the role of oil price for Central Bankers may be very different depending on the objectives and the strategy of each Central Bank regarding inflation and output stabilization.Oil prices, Monetary policy, Taylor rule, Asymmetry

Sacrifice ratio dispersion within the Euro Zone:<br />What can be learned about implementing a Single Monetary Policy?

International audienceThis article focuses on the comparison of sacrifice ratios as an indicator for structural dispersion within the euro area over the period 1972-2003. Estimates of the sacrifice ratio, defined as the cumulative output cost arising from permanent inflation reduction, are obtained using structural VAR models. Results from sub-period analysis as well as ten-year-period rolling estimates lead to two main conclusions. Firstly empirical evidence displays a recent increase in the average sacrifice ratio, which can be linked to the simultaneous decrease in the average inflation rate: this negative relationship between the initial level of inflation and the cost of disinflation can be seen as a justification for the choice of an inflation objective close to 2% for the European Central Bank (ECB) rather than a target of perfect price stability, potentially very damaging. Secondly, we can't provide evidence of any reduction in European sacrifice ratio dispersion, which would suggest that the nominal convergence triggered by the Maastricht Treaty didn't involve a true reduction of structural differences. It is likely to be a problem in the stance of a single monetary policy, since structural differences imply asymmetric responses of real national economies to the same monetary impulse

Sacrifice ratio dispersion within the Euro Zone:What can be learned about implementing a Single Monetary Policy?

This article focuses on the comparison of sacrifice ratios as an indicator for structural dispersion within the euro area over the period 1972-2003. Estimates of the sacrifice ratio, defined as the cumulative output cost arising from permanent inflation reduction, are obtained using structural VAR models. Results from sub-period analysis as well as ten-year-period rolling estimates lead to two main conclusions. Firstly empirical evidence displays a recent increase in the average sacrifice ratio, which can be linked to the simultaneous decrease in the average inflation rate: this negative relationship between the initial level of inflation and the cost of disinflation can be seen as a justification for the choice of an inflation objective close to 2% for the European Central Bank (ECB) rather than a target of perfect price stability, potentially very damaging. Secondly, we can't provide evidence of any reduction in European sacrifice ratio dispersion, which would suggest that the nominal convergence triggered by the Maastricht Treaty didn't involve a true reduction of structural differences. It is likely to be a problem in the stance of a single monetary policy, since structural differences imply asymmetric responses of real national economies to the same monetary impulse.Sacrifice ratio ; monetary policy ; convergence ; Economic and Monetary Union (EMU)

The asymmetric relationship between oil prices and activity in the EMU: Does the ECB monetary policy play a role?

Monetary policy is usually perceived as an important transmission channel in the negative relationship between oil prices and economic performance. It may also constitute a short-term explanation of the non-linearity in this relationship, since Central Bankers may be more sensitive to the potential inflationary threats entailed by high oil price increases than to small increases or decreases. In this paper, we use an extended Taylor rule to investigate the role of oil prices in the ECB monetary policy strategy. A contemporaneous reaction function is estimated using both a GMM framework and an Ordered Probit model, and several oil indicators are constructed and tested. The main results suggest that oil prices play a key role in the ECB interest-rate setting, since it appears as a relevant indicator of future inflation. However, the ECB seems to react asymmetrically: only oil price increases influence its decision setting, not oil prices decreases. Monetary policy may thus transmit and amplify the asymmetry in the relationship between oil prices and activity in the euro area. Further investigations suggest that a preference for price stability provides an important explanation of this asymmetric behaviour of the ECB

The asymmetric relationship between oil prices and activity in the EMU: Does the ECB monetary policy play a role?

Monetary policy is usually perceived as an important transmission channel in the negative relationship between oil prices and economic performance. It may also constitute a short-term explanation of the non-linearity in this relationship, since Central Bankers may be more sensitive to the potential inflationary threats entailed by high oil price increases than to small increases or decreases. In this paper, we use an extended Taylor rule to investigate the role of oil prices in the ECB monetary policy strategy. A contemporaneous reaction function is estimated using both a GMM framework and an Ordered Probit model, and several oil indicators are constructed and tested. The main results suggest that oil prices play a key role in the ECB interest-rate setting, since it appears as a relevant indicator of future inflation. However, the ECB seems to react asymmetrically: only oil price increases influence its decision setting, not oil prices decreases. Monetary policy may thus transmit and amplify the asymmetry in the relationship between oil prices and activity in the euro area. Further investigations suggest that a preference for price stability provides an important explanation of this asymmetric behaviour of the ECB

Explaining inflation differentientials in the euro area : evidence from a dynamic panel data model

International audienc

Explaining inflation differentials in the Euro area : dynamic panel data evidence

The dispersion of national inflation rates within the euro area slightly increased after the adoption of the single currency in 1999, and the relative positions of EMU countries in terms of inflation rates don&apos;t seem to have changed much between 1999 and 2005: Germany and Austria systematically exhibited below-average annual inflation rates, whereas Spain, Portugal and Ireland remained among the most inflationary countries (with annualised inflation rates that sometimes exceeded 5%). The high persistence of inflation differentials appears as a specific feature of the euro area, since such phenomenon has not been observed within the United States at the same time. Results based on the estimates of a dynamic panel data model suggest that euro area inflation differentials are partly the results of a price level convergence process which has been enhanced by the progress towards a single European market and increased transparency following the introduction of the single currency. Inflation differentials also stem from differences in the exposure to nominal effective exchange rate deviations, as well as differences in the exposure to oil price shocks. Finally, inflation differentials in the euro area are also the reflection of remaining cyclical asymmetries amplified by different degrees of inflation persistence

Explaining Inflation Differentials in the Euro Area: Evidence from a Dynamic Panel Data Model

The dispersion of national inflation rates within the euro area slightly increased after the adoption of the single currency in 1999, and the relative positions of EMU countries in terms of inflation rates don&apos;t seem to have changed much between 1999 and 2005: Germany and Austria systematically exhibited below-average annual inflation rates, whereas Spain, Portugal and Ireland remained among the most inflationary countries (with annualised inflation rates that sometimes exceeded 5%). The high persistence of inflation differentials appears as a specific feature of the euro area, since such phenomenon has not been observed within the United States at the same time. Results based on the estimates of a dynamic panel data model suggest that euro area inflation differentials are partly the results of a price level convergence process which has been enhanced by the progress towards a single European market and increased transparency following the introduction of the single currency. Inflation differentials also stem from differences in the exposure to nominal effective exchange rate deviations, as well as differences in the exposure to oil price shocks. Finally, inflation differentials in the euro area are also the reflection of remaining cyclical asymmetries amplified by different degrees of inflation persistence