Evaluating The Stresses From ECB Monetary Policy In The Euro Area

This paper investigates the extent to which euro area monetary policy has responded to evolving economic conditions in individual member states as opposed to the euro area as a whole. Based on a forward-looking Taylor rule-type policy reaction function, the authors conduct counterfactual exercises that compare the monetary policy behavior of the ECB under alternative hypothetical scenarios: The euro member states make individual policy decisions, and the ECB responds to the economic conditions of individual members. Stress measures are then constructed to evaluate the degree of divergence of member state economies under these two hypothetical scenarios.