Business & Management Studies

Abstract

This study examines the effectiveness of the monetary policy of the European Central Bank (ECB) in managing inflation in the Euro Area compared to the independent monetary policy of the seven European Union Member States outside the Economic and Monetary Union (EMU). It highlights the complexity of applying a centralized one-size-fits-all approach to diverse economies, which highlights the differences between the core and peripheral EMU countries and the unique challenges faced by the non-Eurozone countries. In addition, the study includes an analysis of the stress indicator, defined as the difference between the ECB’s main refinancing rate and the optimal rate of a central bank of the non-EMU countries. This indicator reflects whether the ECB’s monetary policy has been too loose or too restrictive relative to the needs of the non-Euro Area countries. The stress indicator is further analyzed across key economic periods, including past crises, to assess its volatility. Using econometric models, the study assesses the impact of optimal interest rates and macroeconomic indicators on inflation in three groups: the EU as a whole, the Euro Area and the non-Euro Area countries. This multi-faceted approach provides valuable insights into the varying effectiveness of centralized and independent monetary policies in addressing inflation challenges.