Ever since its establishment in 1999, the European Central Bank worked on maintaining relative price stability mainly through inflation targeting. The ECB aims at a target inflation rate below but close to 2%. However, the diversity among the member states in the European Union and the Eurozone requires not only collective attention on the EU economy but also on each individual member state. Some Eurozone member states experience generally higher levels of inflation and higher unemployment. On the other side are countries like Germany which are more concerned with maintaining low inflation only. Many economists and politicians criticize the ECB for its monetary decision-making, which affects various member states differently and could drive their economies out of alignment (Salvatore, 2002).
The literature on the topic suggests a theory also known as the German Dominance Hypothesis (GDH), which explains the prevailing role of Germany and German's economic objectives on the ECB decision-making process. The main purpose of this paper is to study the reasoning behind this commonly spread criticism of the European Central bank and test if the ECB's monetary policy is beneficial for the Eurozone members as a whole or only for a select group of countries, which have similar economic profiles. Or in other words, the paper establishes the differential impact of the ECB monetary policies on the Eurozone member states with the expectations that the policy will benefit mostly the German economy and other economies with similar low-inflation targeting needs and will negatively impact others, which face high unemployment rates, in general.
Petrova, Teodora D., "How European is the European Central Bank's Monetary Policy?" (2010). Honors Projects. Paper 109.