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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.

Suggested Citation

  • Carlo Altavilla & Luigi Landolfo, 2005. "Do central banks act asymmetrically? Empirical evidence from the ECB and the Bank of England," Applied Economics, Taylor & Francis Journals, vol. 37(5), pages 507-519.
  • Handle: RePEc:taf:applec:v:37:y:2005:i:5:p:507-519
    DOI: 10.1080/0003684042000307072
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    Cited by:

    1. Stefano d'Addona & Ilaria Musumeci, 2012. "The British opt-out from the European Monetary Union: empirical evidence from monetary policy rules," CEIS Research Paper 225, Tor Vergata University, CEIS, revised 26 Mar 2012.
    2. Belke, Ansgar & Klose, Jens, 2009. "Does the ECB Rely on a Taylor Rule? - Comparing Ex-post with Real Time Data," Ruhr Economic Papers 133, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    3. Castro, Vitor, 2008. "Are Central Banks following a linear or nonlinear (augmented) Taylor rule?," Economic Research Papers 269883, University of Warwick - Department of Economics.
    4. Beldi Lamia & Mouldi Djelassi, 2020. "Is the Tunisian Central Bank following a Linear or a Nonlinear Augmented Taylor Rule?," International Journal of Economics and Financial Issues, Econjournals, vol. 10(3), pages 69-78.
    5. Cevik, Emrah Ismail & Dibooglu, Sel & Kutan, Ali M., 2014. "Monetary and fiscal policy interactions: Evidence from emerging European economies," Journal of Comparative Economics, Elsevier, vol. 42(4), pages 1079-1091.
    6. 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, Elsevier, vol. 41(2), pages 147-171, September.
    7. Stefano d'Addona & Ilaria Musumeci, 2013. "The British opt-out from the European Monetary Union: empirical evidence from monetary policy rules," Applied Financial Economics, Taylor & Francis Journals, vol. 23(23), pages 1783-1795, December.
    8. 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.
    9. Jens Klose, 2019. "Are Eastern European Taylor Reaction Functions Asymmetric in Inflation or Output? Empirical Evidence for Four Countries," Eastern European Economics, Taylor & Francis Journals, vol. 57(1), pages 31-49, January.
    10. 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," Staff Working Papers 06-22, Bank of Canada.
    11. Alexander Perruchoud, 2009. "Estimating a Taylor Rule with Markov Switching Regimes for Switzerland," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 145(II), pages 187-220, June.
    12. Ansgar Belke & Thorsten Polleit, 2007. "How the ECB and the US Fed set interest rates," Applied Economics, Taylor & Francis Journals, vol. 39(17), pages 2197-2209.
    13. Jesus Garcia-Iglesias, 2007. "How the European Central Bank decided its early monetary policy?," Applied Economics, Taylor & Francis Journals, vol. 39(7), pages 927-936.
    14. 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.
    15. Curi, Claudia & Murgia, Lucia Milena, 2023. "Forecast Targeting and Financial Stability: Evidence from the European Central Bank and Bank of England," Finance Research Letters, Elsevier, vol. 51(C).

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