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What Monetary Authorities do - an Examination of Reaction Functions for Germany, Japan, the UK and the US

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  • Jagjit S. Chadha
  • Norbert G. J. Janssen

Abstract

Following the end of the Bretton Woods system, national monetary authorities adopted various forms of feedback rule for monetary policy. This paper investigates the role of discretion in following stated rules. We motivate a simple reaction function for monetary authorities' official interest rates which may operate regardless of the stated policy. The reaction function is tested for Germany, Japan, the UK and the US with quarterly cyclical data since 1971. We find reasonable evidence to suggest that it is possible to characterise official rates as reacting to a similar set of cyclical variables, across countries and through time, irrespective of the declared policy rule. The differences in relative weights attached to feedback variables do not seem to be explained by stated policy rules.

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Bibliographic Info

Article provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.

Volume (Year): 133 (1997)
Issue (Month): III (September)
Pages: 455-476

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Handle: RePEc:ses:arsjes:1997-iii-9

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  1. Bennett T. McCallum, 1994. "Monetary Policy and the Term Structure of Interest Rates," NBER Working Papers 4938, National Bureau of Economic Research, Inc.
  2. King, Mervyn, 1995. "Credibility and Monetary Policy: Theory and Evidence," Scottish Journal of Political Economy, Scottish Economic Society, vol. 42(1), pages 1-19, February.
  3. Fischer, Stanley, 1990. "Rules versus discretion in monetary policy," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 21, pages 1155-1184 Elsevier.
  4. Richard H. Clarida & Mark Gertler, 1997. "How the Bundesbank Conducts Monetary Policy," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 363-412 National Bureau of Economic Research, Inc.
  5. Bernanke, Ben S. & Mihov, Ilian, 1997. "What does the Bundesbank target?," European Economic Review, Elsevier, vol. 41(6), pages 1025-1053, June.
  6. Bennett T. McCallum, 1989. "Targets, Indicators, and Instruments of Monetary Policy," NBER Working Papers 3047, National Bureau of Economic Research, Inc.
  7. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
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