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The EBC Monetary Policy and its Taylor-type Reaction Function

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  • Carstensen Kai
  • Colavecchio Roberta

Abstract

In this paper we review and estimate Taylor-type reaction functions of the ECB for the first five years of EMU. We find economically plausible specifications indicating that the ECB has attached a large and stabilizing weight to inflation but no significant weight to money growth. This result supports the view that the ECB strives to maintain low inflation, but contradicts the claim made by the ECB that the monetary pillar is of particular importance. In a further step, we analyse the structural stability of the estimated reaction functions. While a recursive analysis indicates some signs of instability in June 2003, which almost coincides with the strategy revision of the ECB announced in May 2003, it is difficult to verify this by means of formal statistical tests. Overall, the estimation and test results indicate that reaction functions with survey indicators as explanatory variables have plausible inflation and output gap weights and show least evidence of instability.

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File URL: http://www.rivisteweb.it/download/article/10.1427/23295
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Bibliographic Info

Article provided by Società editrice il Mulino in its journal Rivista italiana degli economisti.

Volume (Year): (2006)
Issue (Month): 1 ()
Pages: 51-86

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Handle: RePEc:mul:jqat1f:doi:10.1427/23295:y:2006:i:1:p:51-86

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Related research

Keywords: Taylor Rule; monetary policy; EMU.;

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Cited by:
  1. Riccardo Cristadoro & Fabrizio Venditti & Giuseppe Saporito, 2008. "Forecasting inflation and tracking monetary policy in the euro area: does national information help?," Temi di discussione (Economic working papers) 677, Bank of Italy, Economic Research and International Relations Area.

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