Advanced Search
MyIDEAS: Login

Modelling and Identifying Central Banks' Preferences

Contents:

Author Info

  • Favero, Carlo A
  • Rovelli, Riccardo

Abstract

We propose an approach to identify independently the parameters describing the structure of the economy from those describing central bank preferences. We first estimate a parsimonious structural model for US inflation, US output-gap and the world commodity price index. We then proceed to the identification of central bank preferences by estimating by GMM the Euler equations for the solution of the intertemporal optimization problem relevant to the central bank. The empirical analysis of the structural model shows that the persistency of real interest rates effects on aggregate demand is sufficient to generate an autoregressive structure in any interest rate rule. From estimation of the Euler equations, we infer that strict inflation targeting together with real interest rate smoothing delivers an optimal policy rule capable of replicating the observed path of real interest rates over the sample 1983:1 - 1998:3. Our empirical findings imply that the output gap enters into the optimal interest rate rule only as a leading indicator of future inflation, and we reject the hypothesis that output stabilization is an independent argument in the loss of function of the Fed.

Download Info

If 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.
File URL: http://www.cepr.org/pubs/dps/DP2178.asp
Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2178.

as in new window
Length:
Date of creation: Jun 1999
Date of revision:
Handle: RePEc:cpr:ceprdp:2178

Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820

Order Information:
Email:

Related research

Keywords: Central Bank Preferences; GMM Estimation of Euler Equations; Inflation Targeting;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
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.:
as in new window
  1. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Monetary policy shocks: what have we learned and to what end?," Working Paper Series, Macroeconomic Issues WP-97-18, Federal Reserve Bank of Chicago.
  2. Stephen G. Cecchetti & Margaret M. McConnell & Gabriel Perez Quiros, 1999. "Policymakers' revealed preferences and the output-inflation variability trade-off: implications for the European system of central banks," Proceedings, Federal Reserve Bank of San Francisco.
  3. Lars E. O. Svensson, 2000. "Does the P* Model Provide Any Rationale for Monetary Targeting?," German Economic Review, Verein für Socialpolitik, vol. 1(1), pages 69-81, 02.
  4. Glenn Rudebusch & Lars E.O. Svensson, 1999. "Policy Rules for Inflation Targeting," NBER Chapters, in: Monetary Policy Rules, pages 203-262 National Bureau of Economic Research, Inc.
  5. Bernanke, Ben S. & Mihov, Ilian, 1995. "Measuring Monetary Policy," Economics Series 10, Institute for Advanced Studies.
  6. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
  7. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  8. Marvin Goodfriend & Robert King, 1997. "The New Neoclassical Synthesis and the Role of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 231-296 National Bureau of Economic Research, Inc.
  9. Marvin Goodfriend, 1986. "Interest rate smoothing and price level trend-stationarity," Working Paper 86-04, Federal Reserve Bank of Richmond.
  10. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
  11. Richard Clarida & Jordi Gali & Mark Gertler, 1997. "Monetary Policy Rules in Practice: Some International Evidence," NBER Working Papers 6254, National Bureau of Economic Research, Inc.
  12. John B. Taylor, 1996. "How should monetary policy respond to shocks while maintaining long-run price stability? Conceptual issues," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 181-195.
  13. Glenn D. Rudebusch, 1999. "Is the Fed too timid? Monetary policy in an uncertain world," Working Papers in Applied Economic Theory 99-05, Federal Reserve Bank of San Francisco.
  14. Richard H. Clarida & Mark Gertler, 1997. "How the Bundesbank Conducts Monetary Policy," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 363-412 National Bureau of Economic Research, Inc.
  15. Brian Sack, 1998. "Does the Fed act gradually? a VAR analysis," Finance and Economics Discussion Series 1998-17, Board of Governors of the Federal Reserve System (U.S.).
  16. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  17. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Brzozowski, Michal, 2004. "Identifying central bank’s preferences: the case of Poland," Working Papers in Economics 143, University of Gothenburg, Department of Economics.
  2. Saint-Paul, G. & Bentolila, S., 2000. "Will EMU Increase Eurosclerosis?," Papers 0004, Centro de Estudios Monetarios Y Financieros-.
  3. Anton Muscatelli & Patrizio Tirelli & Carmine Trecroci, 2001. "Monetary and Fiscal Policy Interactions over the Cycle: Some Empirical Evidence," Working Papers 2002_13, Business School - Economics, University of Glasgow, revised Oct 2002.
  4. Stefan Krause & Fabio Méndez, 2005. "Policy Makers' Preferences, Party Ideology, and the Political Business Cycle," Southern Economic Journal, Southern Economic Association, vol. 71(4), pages 752-767, April.
  5. Helge Berger & Ulrich Woitek, . "Does Conservatism Matter? A Time Series Approach to Central Banking," Working Papers 9814, Business School - Economics, University of Glasgow, revised May 1999.
  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.
  7. Marco Buti & Martin Larch & Fabio Balboni, 2009. "Monetary and fiscal policy interactions in the EMU when cyclical conditions are uncertain," Empirica, Springer, vol. 36(1), pages 21-44, February.
  8. Rotondi, Zeno, 2000. "Designing instrument rules for monetary stability: the optimality of interest-rate smoothing," Discussion Paper Series In Economics And Econometrics 0008, Economics Division, School of Social Sciences, University of Southampton.
  9. Anton Muscatelli & Patrzio Tirelli & Carmine Trecroci, 1998. "Does Institutional Change Really Matter? Inflation Targets, Central Bank Reform And Interest Rate Policy In The Oecd Countries," Working Papers 1999_20, Business School - Economics, University of Glasgow, revised Jul 1999.
  10. Fabio Balboni & Marco Buti & Martin Larch, 2007. "ECB vs Council vs Commission: Monetary and fiscal policy interactions in the EMU when cyclical conditions are uncertain," European Economy - Economic Papers 277, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  11. Karsten Ruth, 2007. "Interest rate reaction functions for the euro area," Empirical Economics, Springer, vol. 33(3), pages 541-569, November.
  12. Marc-Alexandre Sénégas, 2002. "La politique monétaire face à l'incertitude : un survol méthodologique des contributions relatives à la zone euro," Revue d'Économie Financière, Programme National Persée, vol. 65(1), pages 177-200.
  13. Stefan Krause, 2003. "Measuring Monetary Policy Efficiency in European Union Countries: The Pre-EMU Years," Emory Economics 0311, Department of Economics, Emory University (Atlanta).
  14. Xavier Debrun, 2000. "Fiscal Rules in a Monetary Union: A Short-Run Analysis," Open Economies Review, Springer, vol. 11(4), pages 323-358, October.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:2178. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

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.