Taylor rule and EMU - Monetary Policy Determination and ECB's Preferences

The aim of the article is to evaluate the preferences of the ECB in monetary policy and to compare them with preferences of the central banks of new EU member countries from Central and Eastern Europe. The ECB's responsibility for the primary objective (price stability) often contrasts with the requirement for economic growth stabilization policy from the national governments.
There are doubts if the current members of Eurozone constitute an optimum currency area (the Eurozone 12 is recently the combination of rapidly growing and slow-growing - low inflationary countries). The differences between the countries will even expand during the European monetary union enlargement by new EU member countries. Consequently the probability of asymmetric shocks will increase. The main question is the ability of ECB to fulfill the needs of all EMU member countries in terms of optimal monetary policy. In the first part the authors analyze differences between the preferences of the ECB and national authorities (governments). The negative experiences of Ireland, Italy and other EMU members with current status quo help us to understand fear of future member countries from possible impact of common monetary policy on their national economies.
The second part of the paper deals with interest rates determination by ECB and compares it with expectations (requirements) from EMU member and EMU candidate countries. The main contribution of the article may be seen in central bank's preferences analyses - the preferences are defined as the parameters in Taylor rule (the weights given by ECB and national authorities to the price stability and economic growth stimulation).
The hypothesis is defined as following: are the preferences of ECB in line with the preferences of national central banks of EMU candidate countries?
The empirical analysis is based on the Taylor rule decomposition. The hypothesis is tested by regression analysis. Time series regression model uses relations between the inflation target, potential output, current macroeconomic situation on the one side and current monetary policy strategy, represented by interest rates, on the other side.
A range of empirical studies refers to differences between the desired interest rates of member and future member countries of EMU. The level of desired interest rates changes continuously according to the current economic situation of individual national economies. The differences are given by dissimilarities in financial systems, transmission mechanisms, and historical context of monetary arrangements. The authors suppose that the national authorities' and central banks' preferences are constant in the short time or identical before and after enlargement. The main idea of the article is that the traditional approach, which compares desired interest rates by national central banks, is irrelevant before full membership in EMU. The center of the problem is the mutual agreement on preferences of common monetary policy. The answer to the question: how to evaluate real impact of common monetary policy on real economy of EMU candidate countries after their entrance to Eurozone, is expected result of the article.

Keywords: Taylor rule, ECB, monetary integration, inflation targeting, interest rate determination

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The results introduced in the article are outcomes of the research intent n. MSM 6215648904 with the title"The Czech Economy in the Process of Integration and Globalization, and the Development of Agricultural Sector and the Sector of Services under the New Conditions of the Integrated European Market", thematic area "Macroeconomic and microeconomic performance of the Czech economy, and the Czech government's economical-political measures in the context of the integrated European market." The holder of the research intent is Mendel University of Agriculture and Forestry Brno, Faculty of Business and Economics.