For instance, if the labour and product markets are different, then the mechanisms with which the shock spreads and the mechanisms for the transmission of monetary policy may be different, and that in turn may entail different responses in terms of interest rate variation and levels. And finally, the third criterion concerns the preferences of the central bank and, on a broader level, of society as a whole, which may justify differences in approach. I would like to take a brief look at these three aspects (shock, structures and preferences) in greater depth, on the basis of analytical considerations and empirical results. 2.1  Macroeconomic shocks  Let us consider the extreme case of two countries whose central banks are absolutely identical in terms of preferences and of their decision-making systems. In other words, let us pretend that European monetary policy is not decided by the ECB, but by the Federal Reserve System. Next, let us suppose that the two areas are hit by macroeconomic shocks that are different in terms of their magnitude, nature and timing. If that were so, even if the same central bank were making the monetary policy decisions in both areas, the difference in the shock could be such as to demand broad and frequent official rate adjustments in one instance, while more moderate and gradual intervention might be sufficient in the other.
This difference may explain why, especially in cyclical slowdown phases, monetary policy action in the euro area tends to be less aggressive than it is in the United States. In the United States, on the other hand, analysis seems to show that demand shocks tend to prevail, which puts pressure on inflation and on economic activity simultaneously. Supply shocks like those related to productivity tend to have a considerable impact on demand if agents expect them to have an impact on permanent income, affecting consumption. For example, the increase in productivity in the second half of the 1990s led to strong growth in consumption in the United States, financed by debt. In this context, the monetary policy reaction can be more decisive, and transmitted through relatively more marked and more frequent official rate adjustments. This is true in phases both of economic growth and of economic slowdown. In conclusion, if Europe’s economy and the US economy suffer shocks of a different nature, it is only natural that the responses should be partly different. Some studies suggest that the role of shocks is the predominant factor in explaining the differences in conduct between the 3 ECB and the Federal Reserve. 2.2. Economic structure: the propagation of shocks  Now let us move on to the possible differences in the two economies’ structures.