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Do central banks act asymmetrically? Empirical evidence from the ECB and the Bank of England

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  • Carlo Altavilla
  • Luigi Landolfo

Abstract

The paper attempts to exploit whether monetary authorities have a different behaviour during recession and expansion. To this end, a multivariate extension of Hamilton Markov-switching model is adopted. First, regime dependent Taylor-type rules are estimated for the Euro Area and the United Kingdom in order to capture the systematic behaviour of central banks. Then, impulse response functions that account for the different phases of the business cycle are analysed. In addition, a comparative analysis concerning the estimated rules as well as the different reaction of real economy to monetary shocks is implemented. The study strongly suggests that central banks cannot neglect the regime where the monetary action takes place. It follows that the phase of business cycle is an important matter in monetary policy decision process.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 37 (2005)
Issue (Month): 5 ()
Pages: 507-519

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Handle: RePEc:taf:applec:v:37:y:2005:i:5:p:507-519

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Cited by:
  1. Castro, Vítor, 2008. "Are Central Banks following a linear or nonlinear (augmented) Taylor rule?," The Warwick Economics Research Paper Series (TWERPS) 872, University of Warwick, Department of Economics.
  2. Stefano D'Addona & Ilaria Musumeci, 2011. "The British Opt-Out From The European Monetary Union: Empirical Evidence From Monetary Policy Rules," Working Papers 0611, CREI Università degli Studi Roma Tre, revised 2011.
  3. Fredj Jawadi & Sushanta K. Mallick & Ricardo M. Sousa, 2011. "Monetary Policy Rules in the BRICS: How Important is Nonlinearity?," NIPE Working Papers 18/2011, NIPE - Universidade do Minho.
  4. Ansgar Belke & Jens Klose, 2009. "Does the ECB Rely on a Taylor Rule?: Comparing Ex-post with Real Time Data," Discussion Papers of DIW Berlin 917, DIW Berlin, German Institute for Economic Research.
  5. Anna Piretti & Charles St-Arnaud, 2006. "Launching the NEUQ: The New European Union Quarterly Model, A Small Model of the Euro Area and U.K. Economies," Working Papers 06-22, Bank of Canada.
  6. Belke, Ansgar & Polleit, Thorsten, 2006. "How the ECB and US Fed set interest rates," Frankfurt School - Working Paper Series 72, Frankfurt School of Finance and Management.
  7. Klose, Jens, 2011. "Asymmetric Taylor reaction functions of the ECB: An approach depending on the state of the economy," The North American Journal of Economics and Finance, Elsevier, vol. 22(2), pages 149-163, August.
  8. Ansgar Belke & Jens Klose, 2011. "Does the ECB Rely on a Taylor Rule During the Financial Crisis? Comparing Ex-post and Real Time Data with Real Time Forecasts," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 41(2), pages 147-171, September.

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