This chapter examines how each central bank (Federal Reserve and the European Central Bank) has performed in recent years with the aim of understanding the similarities and differences. It is observed that the paths of both interest rates and real output in the two economies have been different over the years. These differences reflect differences in policy, differences in structure (e.g., flexible versus rigid labor markets, bank versus open market finance, etc.), or differences in the nature of the shocks. The chapter estimates a small-scale monetary dynamic monetary stochastic general...

This chapter examines how each central bank (Federal Reserve and the European Central Bank) has performed in recent years with the aim of understanding the similarities and differences. It is observed that the paths of both interest rates and real output in the two economies have been different over the years. These differences reflect differences in policy, differences in structure (e.g., flexible versus rigid labor markets, bank versus open market finance, etc.), or differences in the nature of the shocks. The chapter estimates a small-scale monetary dynamic monetary stochastic general equilibrium (DSGE) model for each country that is flexible enough to allow for differences in policy, structure, and shocks. The principal finding is that the sluggish behavior of the euro area economy relative to the United States primarily reflects differences in shocks.