National vs. European mandate: a rational choice model of interest rate decisions by the European Central Bank

Abstract

The aim of this paper is to investigate to what extent the members of the Governing Council of the European Central Bank (ECB) act as if they had a national mandate, instead of acting in the interests of price stability in the euro area as a whole. The paper develops a simple rational choice model of interest rate decisions inside the Governing Council of the ECB based on national mandates, and tests it against a model based on a European mandate, using monthly data from January 1999 to July 2003. The paper concludes that the model assuming national mandates explains the data better, and derives some implications for the reform of the ECB and other pseudo-independent institutions such as the European Commission, especially in the eve of the next enlargement.