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On the Robustness of the "Taylor Rule" in the EMU

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Author Info
Maria ELEFTHERIOU
Abstract

Following a policy rule mechanically when operating monetary policy is neither realistic nor practical. Nevertheless, monetary policy rules have received a great deal of attention in recent macroeconomic research. The paper focuses on a famous interest rate rule, namely the Taylor Rule, to show that the rule parameters are robust to most of the output gap measures and the specifications considered, i.e. the inflation coefficient is above unity and the output gap coefficient is positive. The estimated rule is shown to track the actual policy performance during the EMU period remarkably well. In addition, the estimated rule is used as an indicator of macroeconomic convergence in the union and it is demonstrated that the optimal EMU rate has not been in accordance with domestic conditions in certain countries.

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Paper provided by European University Institute in its series Economics Working Papers with number ECO2003/17.

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Date of creation: 2003
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Handle: RePEc:eui:euiwps:eco2003/17

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E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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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.:
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  7. Volker Clausen & Bernd Hayo, 2005. "Monetary policy in the Euro area – lessons from the first years," International Economics and Economic Policy, Springer, vol. 1(4), pages 349-364, January. [Downloadable!] (restricted)
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  9. Bjorksten, N. & Syrjanen, M., 1999. "Divergences in the Euro Area : A Cause for Concern?," Bank of Finland - Studies in Economics and Finance 11/99, Bank of Finland. Research Department..
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  13. Gerlach, Stefan & Smets, Frank, 1999. "Output gaps and monetary policy in the EMU area1," European Economic Review, Elsevier, vol. 43(4-6), pages 801-812, April. [Downloadable!] (restricted)
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  19. Frank Smets, 1998. "Output gap uncertainty: does it matter for the Taylor rule?," BIS Working Papers 60, Bank for International Settlements. [Downloadable!]
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  20. Dornbusch, Rudiger & Favero, Carlo A & Giavazzi, Francesco, 1998. "A Red Letter Day?," CEPR Discussion Papers 1804, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  22. Morten O. Ravn & Harald Uhlig, 2001. "On Adjusting the HP-Filter for the Frequency of Observations," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  23. Rudi Dornbusch & Carlo Favero & Francesco Giavazzi, 1998. "Immediate challenges for the European Central Bank," Economic Policy, CEPR, CES, MSH, vol. 13(26), pages 15-64, 04. [Downloadable!] (restricted)
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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. Leon, Costas, 2006. "The Taylor rule: can it be supported by the data?," MPRA Paper 1650, University Library of Munich, Germany. [Downloadable!]
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