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Monetary Policy Rules in Practice: Some International Evidence

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  • Richard Clarida
  • Jordi Gali
  • Mark Gertler

Abstract

This paper reports estimates of monetary policy reaction functions for two sets of" countries: the G3 (Germany, Japan, and the U.S.) and the E3 (UK, France that since 1979 each of the G3 central banks has pursued an implicit form of inflation targeting which may account for the broad success of monetary policy in those countries over this time" period. The evidence also suggests that these central banks have been forward looking: they" respond to anticipated inflation as opposed to lagged inflation. As for the E3 emergence of the influenced by German" monetary policy. Further, using the Bundesbank's policy rule as a benchmark time of the EMS collapse, interest rates in each of the E3 countries were much higher than" domestic macroeconomic conditions warranted. Taken all together, the results lend support to" the view that some form of inflation targeting may under certain circumstances be superior to" fixing exchange rates, as a means to gain a nominal anchor for monetary policy."

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6254.

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Date of creation: Nov 1997
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Publication status: published as European Economic Review, Vol. 42 (June 1998): 1033-1067.
Handle: RePEc:nbr:nberwo:6254

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  1. Svensson, Lars E O, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1511, C.E.P.R. Discussion Papers.
  2. Clarida, R. & Gertler, M., 1996. "How the Bundesbank Conducts Monetary Policy," Working Papers, C.V. Starr Center for Applied Economics, New York University 96-14, C.V. Starr Center for Applied Economics, New York University.
  3. Barry Eichengreen & Charles Wyplosz, 1993. "The Unstable EMS," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 51-144.
  4. Ben S. Bernanke & Ilian Mihov, 1996. "What Does the Bundesbank Target?," NBER Working Papers 5764, National Bureau of Economic Research, Inc.
  5. Maurice Obstfeld & Kenneth Rogoff, 1995. "The Mirage of Fixed Exchange Rates," NBER Working Papers 5191, National Bureau of Economic Research, Inc.
  6. F. Passacantando, 1996. "Building an institutional framework for monetary stability: the case of Italy (1979-1994)," BNL Quarterly Review, Banca Nazionale del Lavoro, Banca Nazionale del Lavoro, vol. 49(196), pages 83-132.
  7. Laurence Ball, 1997. "Efficient rules for monetary policy," Reserve Bank of New Zealand Discussion Paper Series G97/3, Reserve Bank of New Zealand.
  8. Svensson, Lars E O, 1999. " Inflation Targeting: Some Extensions," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 101(3), pages 337-61, September.
  9. Artus, P. & Avouyi-Dovi, S. & Bleuze, E. & Lecointe, F., 1991. "Transmission of U.S. monetary policy to Europe and asymmetry in the European monetary system," European Economic Review, Elsevier, Elsevier, vol. 35(7), pages 1369-1384, October.
  10. Persson, Torsten & Tabellini, Guido, 1996. "Monetary Cohabitation in Europe," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1380, C.E.P.R. Discussion Papers.
  11. Mervyn King, 1996. "How should central banks reduce inflation? conceptual issues," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 53-91.
  12. Mervyn King, 1996. "How should central banks reduce inflation? - Conceptual issues," Economic Review, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, issue Q IV, pages 25-52.
  13. Bernanke, Ben S. & Mihov, Ilian, 1995. "Measuring Monetary Policy," Economics Series, Institute for Advanced Studies 10, Institute for Advanced Studies.
  14. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 195-214, December.
  15. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 1029-54, July.
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