Optimal regional biases in ECB interest rate setting

This paper considers whether the influence of national output and inflation rates on ECB interest rate setting should reflect a country's weight in the eurozone economy. The findings depend on interest rate and exchange rate elasticities and openness vis-à-vis non-eurozone countries. The major conclusion is that the ECB should respond less to inflation shocks in EMU countries that have extensive trading ties with non-eurozone countries. These countries can take care of some of the monetary tightening themselves, through a real appreciation vis-à-vis their non-eurozone trading partners.