Gavin Davies has an interesting post on his Financial Times blog. It is entitled “Strange bedfellows – the Fed and the ECB” and it discusses the co-movements between the Federal funds rate and the Deutschmark/Euro policy rate since 1987. There seems to be a leader-follower pattern, in the sense that Europe has followed the Fed with a 6-12 month lag. Davies concludes that this “is one of the most well established rules in the analysis of monetary policy making“.
This is perhaps a somewhat strong statement, and I would, based on visual inspection (upon which one should be VERY careful), conjecture that most of this correlation is driven by the Fed’s rate cuts in 1990-93 along with the German cuts 1992-95. Hence, the leader-follower pattern may actually not be as evident for the actual Fed/ECB relationship. In any case, as Davies notes, the scene may soon be set for a divergence of any possible prior Fed leadership as the ECB is soon believed to raise rates while the Fed appears set upon keeping rates unchanged for a while.
(I also managed to post a minor comment to Davies’ post pertaining to inflation targeting and Taylor rules.)