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Using pre-EMU money market rates to assess monetary policy in the euro area |
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| Authors: | Jesús Crespo-Cuaresma Ernest Gnan Doris Ritzberger-Grünwald |
| Institution: | a Department of Economics, University of Vienna, Brünnerstrasse 72, A-1210, Vienna, Austria;b Oesterreichische National Bank, Economic Analysis Division, Otto-Wagner-Platz 3, POB 61, A-1011, Vienna, Austria;c Oesterreichische National Bank, Foreign Research Division, Otto-Wagner-Platz 3, POB 61, A-1011, Vienna, Austria |
| Abstract: | This note addresses the problems arising when using national pre-EMU interest rate data in the estimation of monetary policy reaction functions for the euro area. We provide evidence that failing to adjust for interest rate risk premia leads to an overestimation of the response of monetary policy both to inflationary pressures and to the output gap. A method for adjusting pre-EMU interest rate data for risk premia is proposed. |
| Keywords: | European Monetary Union Interest rate risk premium Monetary policy |
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