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A Speed Limit Monetary Policy Rule for the Euro Area

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  • Livio Stracca

Abstract

The main task of central banks is to set the level of short-term nominal interest rates in reaction to economic developments, with the aim of achieving their statutory objectives (typically some combination of inflation and output variability). If agents are forward-looking, central banks can achieve better macroeconomic outcomes by committing to follow a rule-like behaviour. Against this background, the contribution of this paper is twofold. First, it estimates a small-scale model of the euro area economy that can be used as a benchmark for the evaluation of different simple policy rules in the euro area economy. Second, it studies the performance of a relatively new type of rule, labelled 'speed limit' (SL), where the nominal interest rate reacts to the rate of growth in the output gap. The main conclusion of the study is that an SL policy performs remarkably well. Copyright 2007 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal International Finance.

Volume (Year): 10 (2007)
Issue (Month): 1 (03)
Pages: 21-41

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Handle: RePEc:bla:intfin:v:10:y:2007:i:1:p:21-41

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Citations

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Cited by:
  1. Dias, Daniel & Robalo Marques, Carlos & Santos Silva, João M. C., 2006. "Measuring the importance of the uniform nonsynchronization hypothesis," Working Paper Series 0606, European Central Bank.
  2. Vitale, Paolo, 2006. "A Market Microstructure Analysis of Foreign Exchange Intervention," CEPR Discussion Papers 5468, C.E.P.R. Discussion Papers.
  3. Zeno Rotondi & Giacomo Vaciago, 2007. "Lessons from the ECB experience: Frankfurt still matters!," DISCE - Quaderni dell'Istituto di Economia e Finanza ief0070, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  4. Brendon, Charles & Paustian, Matthias & Yates, Tony, 2013. "The pitfalls of speed-limit interest rate rules at the zero lower bound," Bank of England working papers 473, Bank of England.
  5. Gerberding, Christina & Seitz, Franz & Worms, Andreas, 2007. "Money-based interest rate rules: lessons from German data," Discussion Paper Series 1: Economic Studies 2007,06, Deutsche Bundesbank, Research Centre.
  6. Blake, Andrew P., 2012. "Determining optimal monetary speed limits," Economics Letters, Elsevier, vol. 116(2), pages 269-271.

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