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Comparing Monetary Policy Reaction Functions: ECB versus Bundesbank

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  • Bernd Hayo

    ()
    (Faculty of Business Administration and Economics, Philipps Universitaet Marburg)

  • Boris Hofmann

    (Zentrum für Europäische Integrationsforschung, University of Bonn, Walter-Flex-Str. 3, D-53113 Bonn, Germany)

Abstract

This paper compares the ECB’s conduct of monetary policy with that of the Bundesbank. Estimated monetary policy reaction functions for the Bundesbank (1979:4-1998:12) and the European Central Bank (1999:1-2004:5) show that, while the ECB and the Bundesbank react similarly to expected inflation, the ECB reacts significantly stronger to the output gap. Theoretical considerations suggest that this stronger response to the output gap may rather be due to a higher interest rate sensitivity of the German output gap than to a higher weight given to output stabilisation by the ECB. Counterfactual simulations based on the estimated interest rate reaction functions suggest that German interest rates would not have been lower under a hypothetical Bundesbank regime after 1999. However, this conclusion crucially depends on the assumption of an unchanged long-run real interest rate for the EMU period. Adjusting the Bundesbank reaction function for the lower long-run real interest rate estimated for the ECB regime reverses this conclusion.

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File URL: http://www.uni-marburg.de/fb02/makro/forschung/gelbereihe/artikel/2005-02-Hayo-final.pdf
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Bibliographic Info

Paper provided by Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) in its series Marburg Working Papers on Economics with number 200502.

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Length: 23 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:mar:volksw:200502

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Keywords: Taylor rule; monetary policy; ECB; Bundesbank;

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