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

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Author Info
Katrin Wesche

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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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Publisher 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
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Handle: RePEc:bon:bonedp:bgse21_2003

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

Find related papers by JEL classification:
E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions

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References listed on IDEAS
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Cited by:
(explanations, 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.)

  1. Maria Eleftheriou & Dieter Gerdesmeier & Barbara Roffia, 2006. "Monetary policy rules in the pre-EMU era - Is there a common rule?," Working Paper Series 659, European Central Bank. [Downloadable!]
  2. Hui S. Chang, 2005. "Estimating the Monetary Policy Reaction Function for Taiwan: A VAR Model," The International Journal of Applied Economics, Department of General Business, Southeastern Louisiana University, vol. 2(1), pages 50-61, March. [Downloadable!]
  3. Karsten Ruth, 2007. "Interest rate reaction functions for the euro area," Empirical Economics, Springer, vol. 33(3), pages 541-569, November. [Downloadable!] (restricted)
  4. 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. [Downloadable!]
  5. 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. [Downloadable!]
  6. 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. [Downloadable!]
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