This paper investigates the extent to which euro area monetary policy has responded to evolving economic conditions in individual member states as opposed to the euro area as a whole. Based on a forward-looking Taylor rule-type policy reaction function, we conduct counterfactual exercises that...

​This paper first applies the MODWT (Maximal Overlap Discrete Wavelet Transform) to Euro Area quarterly GDP data from 1995-2014 to obtain the underlying cyclical structure of the GDP components. We then design optimal fiscal and monetary policy within a large state-space LQ-tracking wavelet...