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Did the Revision of the ECB Monetary Policy Strategy Affect the Reaction Function?

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Author Info
Kai Carstensen
Roberta Colavecchio

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Abstract

In May 2003 the European Central Bank (ECB) announced the revision of its monetary policy strategy. Although the ECB stressed that the revision would not imply any fundamental change in their decisions, this remains to be verified empirically. Therefore, this paper tries to answer the question whether the strategy revision has induced a structural break in the ECB policy reaction function. To this end, we estimate several Taylor-type reaction functions and conduct a structural change analysis using both recursive parameter estimates and structural change tests. We find that the ECB has been following a stabilizing rule and that there is no clear-cut evidence in favor of a break after the revision, even though some signals of instability show up, particularly in June 2003.

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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1221.

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Length: 31 pages
Date of creation: Jul 2004
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Handle: RePEc:kie:kieliw:1221

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  1. 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. [Downloadable!] (restricted)
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  2. Kai Carstensen, 2006. "Estimating the ECB Policy Reaction Function," German Economic Review, Blackwell Publishing, vol. 7, pages 1-34, 02. [Downloadable!] (restricted)
  3. Svensson, Lars, 2000. "The first Year of the Eurosystem: Inflation Targeting or Not?," Seminar Papers 681, Stockholm University, Institute for International Economic Studies. [Downloadable!]
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  4. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375. [Downloadable!] (restricted)
  5. Taylor, John B., 1999. "The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European central bank," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 655-679, June. [Downloadable!] (restricted)
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  6. D. W. K. Andrews, 2003. "End-of-Sample Instability Tests," Econometrica, Econometric Society, vol. 71(6), pages 1661-1694, November. [Downloadable!] (restricted)
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  7. Ansgar Belke & Wim Kösters & Martin Leschke & Thorsten Polleit, 2003. "Challenges to ECB Credibility," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 225/2003, Department of Economics, University of Hohenheim, Germany.
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  10. Petra Gerlach-Kristen, 2003. "Interest rate reaction functions and the Taylor rule in the Euro area," Working Paper Series 258, European Central Bank. [Downloadable!]
  11. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39, pages 195-214, December. [Downloadable!] (restricted)
  12. Dufour, Jean-Marie & Ghysels, Eric & Hall, Alastair, 1994. "Generalized Predictive Tests and Structural Change Analysis in Econometrics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(1), pages 199-229, February. [Downloadable!] (restricted)
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  13. Sergio Nicoletti Altimari, 2001. "Does money lead inflation in the euro area?," Working Paper Series 063, European Central Bank. [Downloadable!]
  14. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June. [Downloadable!] (restricted)
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  15. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
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  16. Svensson, Lars E.O., 1997. "Inflation Targeting: Some Extensions," Seminar Papers 625, Stockholm University, Institute for International Economic Studies. [Downloadable!]
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  17. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September. [Downloadable!] (restricted)
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  18. John B. Taylor, 2001. "The Role of the Exchange Rate in Monetary-Policy Rules," American Economic Review, American Economic Association, vol. 91(2), pages 263-267, May. [Downloadable!] (restricted)
  19. Jens R. Clausen & Carsten-Patrick Meier, 2003. "Did the Bundesbank Follow a Taylor Rule? An Analysis Based on Real-Time Data," Kiel Working Papers 1180, Kiel Institute for the World Economy. [Downloadable!]
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  20. Barbara Roffia & Dieter Gerdesmeier, 2003. "A comprehensive model on the Euro overnight rate," Working Paper Series 206, European Central Bank. [Downloadable!]
  21. Gunter Coenen & Andrew Levin & Volker Wieland, 2001. "Data uncertainty and the role of money as an information variable for monetary policy," Finance and Economics Discussion Series 2001-54, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  22. Rudebusch, Glenn D. & Svensson, Lars E. O., 2002. "Eurosystem monetary targeting: Lessons from U.S. data," European Economic Review, Elsevier, vol. 46(3), pages 417-442, March. [Downloadable!] (restricted)
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  23. Gerlach, Stefan & Schnabel, Gert, 2000. "The Taylor rule and interest rates in the EMU area," Economics Letters, Elsevier, vol. 67(2), pages 165-171, May. [Downloadable!] (restricted)
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  24. Jon Faust & John H. Rogers & Jonathan H. Wright, 2001. "An empirical comparison of Bundesbank and ECB monetary policy rules," International Finance Discussion Papers 705, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  1. 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. [Downloadable!]
  2. Ansgar Belke & Thorsten Polleit, 2006. "How the ECB and the US Fed Set Interest Rates," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 269/2006, Department of Economics, University of Hohenheim, Germany. [Downloadable!]
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  3. Helge Berger & Jakob de Haan & Jan-Egbert Sturm, 2006. "Does Money Matter in the ECB Strategy? New Evidence Based on ECB Communication," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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