Are Public Preferences Reflected in Monetary Policy Reaction Functions?
AbstractIn this paper, we test whether public preferences for price stability (obtained from the Eurobarometer survey) are actually reflected in the interest rates set by eight central banks. We estimate augmented Taylor (1993) rules for the period 1976-1993 using the dynamic GMM estimator. We find, first, that interest rates do reflect society's preferences since the central banks raise rates when society's inflation aversion is above its long-run trend. Second, the reaction to inflation is non-linearly increasing in the degree of inflation aversion. Third, this emphasis on fighting inflation does not have a detrimental effect on output stabilization. We conclude with some implications concerning the democratic legitimation of central banks.
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Bibliographic InfoPaper provided by Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) in its series MAGKS Papers on Economics with number 201321.
Length: 21 pages
Date of creation: 2013
Date of revision:
Publication status: Forthcoming in
Central Bank; Democratic Legitimation; Eurobarometer; Inflation Aversion; Monetary Policy; Public Preferences; Taylor Rules.;
Other versions of this item:
- Neuenkirch, Matthias, 2014. "Are public preferences reflected in monetary policy reaction functions?," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 60-68.
- D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-04-06 (All new papers)
- NEP-CBA-2013-04-06 (Central Banking)
- NEP-MAC-2013-04-06 (Macroeconomics)
- NEP-MON-2013-04-06 (Monetary Economics)
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