Monetary policy in Europe vs the US: what explains the difference?
This paper compares monetary policy in the US and EMU during the last decade, employing an estimated hybrid New Keynesian cash-in-advance model, driven by five shocks. It appears that the difference between the two monetary policies between 1998 and 2006 is due to both surprises in productivity as well as surprises in wage demands, moving interest rates in opposite directions in Europe and the US, but not due to a more sluggish response in Europe to the same shocks or to different monetary policy surprises.
This research was started when the author was professor at Humboldt Universitaet zu Berlin and there supported by the Deutsche Forschungsgemeinschaft through the SFB 649 "Economic Risk''. I am grateful to Andreas Hornstein for a very useful conversation, to Andy Levin for an excellent discussion and for pointing out an algebraic mistake (now corrected). I am grateful to participants at the Barcelona meeting for many additionally useful remarks. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Monetary Policy in Europe versus the United States: What Explains the Difference?, Harald Uhlig. in International Dimensions of Monetary Policy , Galí and Gertler. 2009