An empirical study of the relationships between the MRO interest rate of the ECB and the structure of production within the EMU

Abstract: In response to the last financial crisis, the European Central Bank (ECB) conducted relatively expansionary monetary policies. This included some stepwise reductions of the Main Refinancing Operations (MRO) interest rate. However, economists of the Austrian school of economics argues that lowering the interest rates have adverse effects through its impact on relative prices in the economy. This is the Austrian Business Cycle Theory (ABCT). This study examines production indices and producer price indices and their correlation with the MRO rate. The data covers the European Monetary Union (EMU) for the period of January 2002 to January 2020. Three industry indices are used for both production and producer prices, these are Mining and quarrying, Capital and Consumer. All three indices are downloaded from the Eurostat database and categorized according to the COMMISSION REGULATION (EC) No 656/2007. The data was statistically examined using two Vector Error Correction Models (VECMs), one which includes the production indices and the MRO rate (1), and one which includes the producer price indices and the MRO rate (2). The results for model (1) confirms the ABCT, whereas the results from model (2) does not seem to confirm the ABCT.