1. Introduction
1. Introduction
If one studies scholarly articles that deal with macroeconomic models of two countries such as, e.g.,
Corsetti/Pesenti (2001), Obstfeld/Rogoff (2001), Clarida et al. (2002), Pappa (2004), or Be-
nigno/Benigno (2006), one usually encounters that the countries’ monetary authorities, if explicitly
modeled at all, are modeled as perfectly symmetric institutions.
This gives rise to the question to which extent these models are able to capture real-world features and if
policy recommendations based on these models’ results are applicable. The reason why this is questionable
is that, in general, two different central banks might each obey a differing and legally binding statute.
Particularly, let us think of the two monetary authorities under examination as the European Central
Bank (ECB) on the one hand and the Federal Reserve System (Fed) on the other.
Article 2 of the Protocol on the Statute of the European System of Central Banks and of the European
Central Bank (1992, 2004) states the following:2
”In accordance with Article 105(1) of this Treaty, the primary objective of the ESCB shall be
to maintain price stability. Without prejudice to the objective of price stability, it shall support
the general economic policies in the Community with a view to contributing to the achievement
of the objectives of the Community as laid down in Article 2 of this Treaty. The ESCB shall act
in accordance with the principle of an open market economy with free competition, favouring
an efficient allocation of resources, and in compliance with the principles set out in Article 4
of this Treaty.”
However, Section 2a of the Federal Reserve Act (1977, 2000) reads:
”The Board of Governors of the Federal Reserve System and the Federal Open Market Com-
mittee shall maintain long run growth of the monetary and credit aggregates commensurate
with the economy’s long run potential to increase production, so as to promote effectively the
goals of maximum employment, stable prices, and moderate long-term interest rates.”
As one can conclude from these diverging statutes, the paramount objective of the ECB is price stability,
whereas for the Fed this goal is just one out of many. Therefore, in order to model monetary policy of each
central bank consistent with their diverging statutes, one should try and incorporate these institutional
features into their respective policy functions.
The analysis shall be carried out by introducing diverging interest-rate rules into a log-linear representa-
tion of a variant of the dynamic stochastic general equilibrium (DSGE) framework by Obstfeld/Rogoff
(2001), which is extended by Calvo (1983) pricing, a more subtle form of nominal rigidities than the one
used in the original article. The reasoning of some parts of Obstfeld/Rogoff (2001) itself is based on
Corsetti/Pesenti (2001).
At first sight, the DSGE framework might mislead the reader to the Real Business Cycle (RBC) literature.
Although the structure of the subsequent model is somewhat similar to RBC models, introducing the
assumptions of [1] monopolistic competition on goods markets and [2] some form of nominal rigidity into
the set-up will rebut this preliminary speculation. In contrast to the typical RBC model, monetary policy
will not be neutral in the short run because of these two departing assumptions (see Gall 2008, pp. 4-5).
This is the basic reason why the present model class is usually referred to as ”New Keynesian”.
The main results of a calibrated version of the model under scrutiny, for which a determinate rational
expectations equilibriums exists, are summarized in the following.
• Simulated aggregate productivity shocks, which are assumed to be positively correlated across coun-
tries, have a negative impact on domestic and foreign output, a result already described for the
closed economy by Gall (2002). The positive correlation of these shocks can be interpreted as
exogenous R&D spill-over effects associated with ”technology sourcing” as laid out by Griffith et
2 More precisely, the responsible body for the monetary policy of the EU is the European System of Central Banks (ESCB),
which comprises the ECB and the national central banks of all 27 EU member states (in 2009).