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Interest rate setting at the ECB: Individual preferences and collective decision making

Author

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  • Cancelo, José Ramón
  • Varela, Diego
  • Sánchez-Santos, José Manuel
Abstract
We investigate whether the members of the Governing Council of the European Central Bank take into account the specific economic conditions of their states of origin, to set the interest rates for the euro area. Testing the national-based view against the Europeanist perspective is a challenging issue, because voting inside the Governing Council is secret, and the final outcome depends both on the individual preferences and the procedures followed by the Governing Council to arrive at a decision. Accordingly, we model interest rate setting as a two-stage process: first, each member of the Governing Council sets his/her preferred rate, and next the Governing Council meets and decides the actual figure. Our empirical analysis shows that domestic developments play a major role in determining the preferred interest rate of the each member; and that some members exert agenda setting power, that precludes some interest rate policies to be considered at the meeting.

Suggested Citation

  • Cancelo, José Ramón & Varela, Diego & Sánchez-Santos, José Manuel, 2011. "Interest rate setting at the ECB: Individual preferences and collective decision making," Journal of Policy Modeling, Elsevier, vol. 33(6), pages 804-820.
    • Handle: RePEc:eee:jpolmo:v:33:y:2011:i:6:p:804-820
    DOI: 10.1016/j.jpolmod.2011.08.017
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    Cited by:

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    3. Hartwell Christopher A., 2019. "Complexity, Uncertainty, and Monetary Policy: Can the ECB Avoid the Unconventional Becoming the ‘New Normal’?," The Economists' Voice, De Gruyter, vol. 16(1), pages 1-13, December.
    4. Seip, Knut L. & McNown, Robert, 2013. "Monetary policy and stability during six periods in US economic history: 1959–2008: a novel, nonlinear monetary policy rule," Journal of Policy Modeling, Elsevier, vol. 35(2), pages 307-325.
    5. Hamza Bennani & Matthias Neuenkirch, 2017. "The (home) bias of European central bankers: new evidence based on speeches," Applied Economics, Taylor & Francis Journals, vol. 49(11), pages 1114-1131, March.

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    More about this item

    Keywords

    European Central Bank; Monetary policy; Policy reaction function; Committees; Nationalistic bias; Voting models; Agenda setting;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F55 - International Economics - - International Relations, National Security, and International Political Economy - - - International Institutional Arrangements
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation

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