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Monetary Policy in Europe: Evidence from Time-Varying Taylor Rules

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  • Katrin Wesche

Abstract

We estimate monetary policy reaction functions for France, Germany, Italy, the United Kingdom, and the United States using a Markov-switching model that incorporates switching in the monetary policy regime as well as an independent switching process for shifts in the state of the economy. Results indicate that over time all central banks have assigned changing weights to inflation and the output gap. Regimes can be classified as ``dovish" with a high weight on output and a low weight on inflation, and ``hawkish" with a high weight on inflation and a low one on output. For France and Italy, the German interest rate had an influence on domestic monetary policy especially at the beginning of the 1980s after the inception of the European Monetary System (EMS). Switching in the residual variance of the monetary rule accounts for heteroscedasticity and turns out to be important for the fit of the model. Robustness of the results is checked by considering alternative specifications of expected inflation and the output gap. In general, results are robust to these changes.

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Bibliographic Info

Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse21_2003.

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Length: 37
Date of creation: Oct 2003
Date of revision:
Handle: RePEc:bon:bonedp:bgse21_2003

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

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Keywords: Monetary policy rule; Taylor rule; Markov switching;

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References

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Citations

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Cited by:
  1. Ruth, Karsten, 2004. "Interest rate reaction functions for the euro area Evidence from panel data analysis," Discussion Paper Series 1: Economic Studies 2004,33, Deutsche Bundesbank, Research Centre.
  2. Ebru Yuksel & Kývýlcým Metin Ozcan & Ozan Hatipoglu, 2012. "A Survey on Time Varying Parameter Taylor Rule: A Model Modified with Interest Rate Pass Through," Working Papers 2012/08, Bogazici University, Department of Economics.
  3. Karsten Ruth, 2007. "Interest rate reaction functions for the euro area," Empirical Economics, Springer, vol. 33(3), pages 541-569, November.
  4. Eleftheriou, Maria & Gerdesmeier, Dieter & Roffia, Barbara, 2006. "Monetary policy rules in the pre-EMU era: Is there a common rule?," Working Paper Series 0659, European Central Bank.
  5. Orlowski, Lucjan T., 2010. "Monetary policy rules for convergence to the Euro," Economic Systems, Elsevier, vol. 34(2), pages 148-159, June.
  6. Hogrefe, Jens, 2007. "The yield spread and GDP growth - Time Varying Leading Properties and the Role of Monetary Policy," Economics Working Papers 2007,12, Christian-Albrechts-University of Kiel, Department of Economics.
  7. Gerberding, Christina & Worms, Andreas & Seitz, Franz, 2004. "How the Bundesbank really conducted monetary policy: An analysis based on real-time data," Discussion Paper Series 1: Economic Studies 2004,25, Deutsche Bundesbank, Research Centre.

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