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Assessing monetary rules performance across EMU countries

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Author Info
Carlo Altavilla (KU Leuven, Belgium)

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Abstract

The topic covered in this paper is the performance of different monetary policy rules used as guidelines in practical policy making. To this end, different rules are evaluated using alternative econometrics techniques. A comparative analysis is made of the ability of the rules to correspond to the historical central bank behaviour and of the volatility of output, inflation and interest rate changes that they imply. The study is conducted of the EMU countries. The results suggest that simple rules perform quite well and that the advantages obtained from adopting an optimal control-based rule are not so great. Moreover, the addition of a forward-looking dimension and of an interest rate smoothing term in the reaction function seems to improve the performance of the rules. Copyright © 2003 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/ijfe.199
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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 8 (2003)
Issue (Month): 2 ()
Pages: 131-151
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Handle: RePEc:ijf:ijfiec:v:8:y:2003:i:2:p:131-151

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Lars E.O. Svensson & Michael Woodford, 2000. "Indicator Variables for Optimal Policy," NBER Working Papers 7953, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Taylor, John B, 1995. "The Monetary Transmission Mechanism: An Empirical Framework," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 11-26, Fall. [Downloadable!] (restricted)
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  3. Bennett T. McCallum, 2000. "The Present and Future of Monetary Policy Rules," NBER Working Papers 7916, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Bennett T. McCallum, 1999. "Analysis of the Monetary Transmission Mechanism: Methodological Issues," NBER Working Papers 7395, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers 638, Stockholm University, Institute for International Economic Studies. [Downloadable!]
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  6. Frank Smets, 2002. "Output gap uncertainty: Does it matter for the Taylor rule?," Empirical Economics, Springer, vol. 27(1), pages 113-129. [Downloadable!] (restricted)
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  7. Michael Woodford, 2000. "Pitfalls of Forward-Looking Monetary Policy," American Economic Review, American Economic Association, vol. 90(2), pages 100-104, May. [Downloadable!] (restricted)
  8. Julio J. Rotemberg & Michael Woodford, 1998. "Interest-Rate Rules in an Estimated Sticky Price Model," NBER Working Papers 6618, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. John B. Taylor, 1994. "The inflation/output variability trade-off revisited," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 21-24. [Downloadable!]
  10. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39, pages 195-214, December. [Downloadable!] (restricted)
  11. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June. [Downloadable!] (restricted)
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  12. Stephen G. Cecchetti, 1997. "Central Bank Policy Rules: Conceptual Issues and Practical Considerations," NBER Working Papers 6306, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Gerlach, Stefan & Schnabel, Gert, 1999. "The Taylor Rule and Interest Rates in the EMU Area," CEPR Discussion Papers 2271, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  14. Bernanke, Ben S. & Gertler, Mark & Waston, Mark, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Working Papers 97-25, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  15. Svensson, Lars E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Seminar Papers 646, Stockholm University, Institute for International Economic Studies. [Downloadable!]
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  16. Gert Schnabel & Stefan Gerlach, 1999. "The Taylor rule and interest rates in the EMU area: a note," BIS Working Papers 73, Bank for International Settlements. [Downloadable!]
  17. Nicoletta Batini & Andrew G Haldane, . "Forward-looking rules for monetary policy," Bank of England working papers 91, Bank of England. [Downloadable!]
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  18. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Maria Eleftheriou & Dieter Gerdesmeier & Barbara Roffia, 2006. "Monetary policy rules in the pre-EMU era - Is there a common rule?," Working Paper Series 659, European Central Bank. [Downloadable!]
  2. Campbell Leith & Simon Wren-Lewis, 2002. "Taylor Rules in the Open Economy," Working Papers 2002_14, Department of Economics, University of Glasgow. [Downloadable!]
  3. Juha Kilponen & Marc-Alexandre Sénégas & Jouko Vilmunen, 2007. "Bayesian versus robust control approach towards parameter uncertainty in monetary policymaking: how close are the outcomes? Some illustrating evidence from the EMU economies," Money Macro and Finance (MMF) Research Group Conference 2006 113, Money Macro and Finance Research Group. [Downloadable!]
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