Unveiling the monetary policy rule in euro area
AbstractThis paper provides evidence that, since the sign of Maastricht Treaty, euro-area monetary authorities mainly follow a strong anti-inflationary policy. This policy can be described by a threshold monetary policy rule model which allows for distinct inflation policy regimes: a low and high. The paper finds that these authorities react more strongly to positive deviations of inflation and/or output from their target levels rather than to the negative. They do not seem to react at all to negative deviations of output from its target level in the low-inflation regime. We argue that this behaviour can be attributed to the attitude of the monetary authorities to build up credibility on stabilizing inflationary expectations. To evaluate the policy implications of the above euro-area monetary policy rule behaviour, the paper simulates a small New Keynesian model. This exercise clearly indicates that the absence of reaction of the euro-area monetary authorities to negative output gap when inflation is very low reduces their efficiency on dampening the effects of negative demand shocks on the economy.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Bank of Greece in its series Working Papers with number 130.
Date of creation: May 2011
Date of revision:
Monetary policy; threshold models; regime-switching; generalized method of moments; New Keynesian model;
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-07-13 (All new papers)
- NEP-CBA-2011-07-13 (Central Banking)
- NEP-EEC-2011-07-13 (European Economics)
- NEP-MAC-2011-07-13 (Macroeconomics)
- NEP-MON-2011-07-13 (Monetary Economics)
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.:
- Athanasios Orphanides & Volker Wieland, 1999.
"Inflation zone targetting,"
Working Paper Series
8, European Central Bank.
- Janko Gorter & Jan Jacobs & Jakob de Haan, 2007. "Taylor Rules for the ECB using Consensus Data," DNB Working Papers 160, Netherlands Central Bank, Research Department.
- Stephan Sauer & Jan-Egbert Sturm, 2007. "Using Taylor Rules to Understand European Central Bank Monetary Policy," German Economic Review, Verein für Socialpolitik, vol. 8, pages 375-398, 08.
- Farmer, Roger E.A. & Waggoner, Daniel F. & Zha, Tao, 2011.
"Minimal state variable solutions to Markov-switching rational expectations models,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 35(12), pages 2150-2166.
- Roger E.A. Farmer & Daniel F. Waggoner & Tao Zha, 2008. "Minimal state variable solutions to Markov-switching rational expectations models," Working Paper 2008-23, Federal Reserve Bank of Atlanta.
- Roger E. A. Farmer & Daniel F. Waggoner & Tao Zha, 2010. "Minimal State Variable Solutions To Markov-Switching Rational Expectations Models," Emory Economics 1003, Department of Economics, Emory University (Atlanta).
- Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999.
"The Science of Monetary Policy: A New Keynesian Perspective,"
CEPR Discussion Papers
2139, C.E.P.R. Discussion Papers.
- Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
- Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
- Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
- Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
- Paolo Surico, 2003. "Asymmetric Reaction Functions for the Euro Area," Oxford Review of Economic Policy, Oxford University Press, vol. 19(1), pages 44-57.
- Gert Peersman & Frank Smets, 1999. "Uncertainty and the Taylor rule in a simple model of the Euro-area economy," Proceedings, Federal Reserve Bank of San Francisco.
- Clausen, Volker & Hayo, Bernd, 2002.
"Monetary policy in the Euro area: Lessons from the first years,"
ZEI Working Papers
B 09-2002, ZEI - Center for European Integration Studies, University of Bonn.
- Volker Clausen & Bernd Hayo, 2002. "Monetary Policy in the Euro Area - Lessons from the First Years," Macroeconomics 0205006, EconWPA.
- Hayo, Bernd & Volker Clausen, 2003. "Monetary Policy in the Euro Area - Lessons from the First Years," Royal Economic Society Annual Conference 2003 103, Royal Economic Society.
- Caner, Mehmet & Hansen, Bruce E., 2004. "Instrumental Variable Estimation Of A Threshold Model," Econometric Theory, Cambridge University Press, vol. 20(05), pages 813-843, October.
- Troy Davig & Eric M. Leeper, 2006.
"Generalizing the Taylor Principle,"
Caepr Working Papers
2006-001, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
- Dolado, Juan J. & María-Dolores, Ramón & Naveira Barrero, Manuel, 2000. "Asymmetries In Monetary Policy Rules: Evidence For Four Central Banks," CEPR Discussion Papers 2441, C.E.P.R. Discussion Papers.
- Thanassis Kazanas & Apostolis Philippopoulos & Elias Tzavalis, 2011. "Monetary Policy Rules And Business Cycle Conditions," Manchester School, University of Manchester, vol. 79(s2), pages 73-97, 09.
- Troy Davig & Eric M. Leeper, 2008.
"Endogenous Monetary Policy Regime Change,"
in: NBER International Seminar on Macroeconomics 2006, pages 345-391
National Bureau of Economic Research, Inc.
- Troy Davig & Eric M. Leeper, 2006. "Endogenous Monetary Policy Regime Change," NBER Working Papers 12405, National Bureau of Economic Research, Inc.
- Troy Davig & Eric Leeper, 2006. "Endogenous monetary policy regime change," Research Working Paper RWP 06-11, Federal Reserve Bank of Kansas City.
- Troy Davig & Eric M. Leeper, 2006. "Endogenous Monetary Policy Regime Change," Caepr Working Papers 2006-002, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
- Frank Kleibergen, 2001. "Testing Parameters in GMM without Assuming that they are identified," Tinbergen Institute Discussion Papers 01-067/4, Tinbergen Institute.
- Christopher Martin & Costas Milas, 2008.
"The Sub-Prime Crisis and UK Monetary Policy,"
Working Paper Series
31-08, The Rimini Centre for Economic Analysis, revised Jan 2008.
- Christopher Martin & Costas Milas, 2004.
"Modelling Monetary Policy: Inflation Targeting in Practice,"
London School of Economics and Political Science, vol. 71(281), pages 209-221, 05.
- Martin, Christopher & Costas Milas, 2002. "Modelling Monetary Policy: Inflation Targeting in Practice," Royal Economic Society Annual Conference 2002 137, Royal Economic Society.
- D H Kim & D R Osborn & M Sensier, 2002.
"Nonlinearity in the Fed's Monetary Policy Rule,"
The School of Economics Discussion Paper Series
0205, Economics, The University of Manchester.
- Kim, Dong Heon & Denise R Osborn & Marianne Sensier, 2003. "Nonlinearity in the Fed's Monetary Policy Rule," Royal Economic Society Annual Conference 2003 121, Royal Economic Society.
- D H Kim & D R Osborn & M Sensier, 2002. "Nonlinearity in the Fed's Monetary Policy Rule," Centre for Growth and Business Cycle Research Discussion Paper Series 18, Economics, The Univeristy of Manchester.
- Jushan Bai & Pierre Perron, 2003.
"Computation and analysis of multiple structural change models,"
Journal of Applied Econometrics,
John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
- Tom Doan, . "RATS programs to replicate examples of Bai-Perron procedure," Statistical Software Components RTZ00008, Boston College Department of Economics.
- Tom Doan, . "BAIPERRON: RATS procedure to perform Bai-Perron Test for Multiple Structural Changes," Statistical Software Components RTS00013, Boston College Department of Economics.
- Tom Doan, . "MULTIPLEBREAKS: RATS procedure to perform multiple structural change analysis," Statistical Software Components RTS00138, Boston College Department of Economics.
- BAI, Jushan & PERRON, Pierre, 1998. "Computation and Analysis of Multiple Structural-Change Models," Cahiers de recherche 9807, Universite de Montreal, Departement de sciences economiques.
- Kourtellos, A. & Tan, C.M. & Stengos, T., 2008.
"THRET: Threshold Regression with Endogenous Threshold Variables,"
0801, University of Guelph, Department of Economics.
- Andros Kourtellos & Thanasis Stengos & Chih Ming Tan, 2008. "THRET: Threshold Regression with Endogenous Threshold Variables," University of Cyprus Working Papers in Economics 3-2008, University of Cyprus Department of Economics.
- Andros Kourtellos & Chih Ming Tan & Thanasis Stengos, 2008. "THRET: Threshold Regression with Endogenous Threshold Variables," Working Paper Series 05-08, The Rimini Centre for Economic Analysis, revised Jan 2008.
- John P. Judd & Glenn D. Rudebusch, 1998. "Taylor's rule and the Fed, 1970-1997," Economic Review, Federal Reserve Bank of San Francisco, pages 3-16.
- Fourçans, André & Vranceanu, Radu, 2006. "Is the ECB so special? A qualitative and quantitative analysis," ESSEC Working Papers DR 06004, ESSEC Research Center, ESSEC Business School.
- Cho, Seonghoon & Moreno, Antonio, 2011. "The forward method as a solution refinement in rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 35(3), pages 257-272, March.
- Fabián Gredig, 2007. "Asymmetric Monetary Policy Rules and the Achievement of the Inflation Target: The Case of Chile," Working Papers Central Bank of Chile 451, Central Bank of Chile.
- Miguel Casares, 2004. "On monetary policy rules for the euro area," Banco de EspaÃÂ±a Working Papers 0415, Banco de EspaÃ±a.
- Kleibergen, Frank, 2007. "Generalizing weak instrument robust IV statistics towards multiple parameters, unrestricted covariance matrices and identification statistics," Journal of Econometrics, Elsevier, vol. 139(1), pages 181-216, July.
- Ullrich, Katrin, 2003. "A Comparison Between the Fed and the ECB: Taylor Rules," ZEW Discussion Papers 03-19, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- Zheng Liu & Daniel Waggoner & Tao Zha, 2009.
"Asymmetric Expectation Effects of Regime Shifts in Monetary Policy,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 12(2), pages 284-303, April.
- Zheng Liu & Daniel Waggoner & Tao Zha, 2009. "Code files for "Asymmetric Expectation Effects of Regime Shifts in Monetary Policy"," Computer Codes 08-80, Review of Economic Dynamics.
- Zheng Liu & Daniel F. Waggoner & Tao Zha, 2008. "Asymmetric expectation effects of regime shifts in monetary policy," Working Paper Series 2008-22, Federal Reserve Bank of San Francisco.
- Kleibergen, Frank & Mavroeidis, Sophocles, 2009. "Weak Instrument Robust Tests in GMM and the New Keynesian Phillips Curve," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(3), pages 293-311.
- Marcelo J. Moreira, 2003. "A Conditional Likelihood Ratio Test for Structural Models," Econometrica, Econometric Society, vol. 71(4), pages 1027-1048, 07.
- Surico, Paolo, 2007. "The Fed's monetary policy rule and U.S. inflation: The case of asymmetric preferences," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 305-324, January.
- Fourcans, Andre & Vranceanu, Radu, 2007. "The ECB monetary policy: Choices and challenges," Journal of Policy Modeling, Elsevier, vol. 29(2), pages 181-194.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christina Tsochatzi).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.