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Asset Prices as Indicators of Euro Area Monetary Policy: An Empirical Assessment of Their Role in a Taylor Rule

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  • Pierre L. Siklos

    ()
    (Wilfrid Laurier University and Viessmann Research Centre Waterloo, Canada and The Rimini Centre for Economics Analysis, Italy.)

  • Martin T. Bohl

    ()
    (WestfŠlische Wilhelms-University MŸnster, Germany)

Abstract

This paper estimates forward-looking and forecast-based Taylor rules for France, Germany, Italy, and the euro area. Performing extensive tests for over-identifying restrictions and instrument relevance, we find that asset prices can be highly relevant as instruments in policy rules. While asset prices improve Taylor rule estimates, different assets prove most relevant across countries and this result could be seen as complicating the tasks of the European Central Bank. Encompassing tests show that forecast-based outperform forward-looking Taylor rules. A policy implication is that central banks ought to release their own forecasts and the basis upon which they are generated.

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Bibliographic Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 32-07.

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Date of creation: Jul 2007
Date of revision: Jul 2007
Handle: RePEc:rim:rimwps:32-07

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Keywords: Monetary policy reaction functions; Asset prices; Instruments; European Central Bank;

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Cited by:
  1. Richard C.K. Burdekin & King Banaian & Mark Hallerberg & Pierre L. Siklos, 2011. "Fiscal and monetary institutions and policies: onward and upward?," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 3(4), pages 340-354, November.
  2. Andrew Hughes Hallett & Jan Libich & Petr Stehlík, 2009. "Macro prudential Policies and Financial Stability," Working Papers 2009.02, School of Economics, La Trobe University.
  3. Matthias Neuenkirch & Pierre L. Siklos, 2013. "What's in a Second Opinion? Shadowing the ECB and the Bank of England," CAMA Working Papers 2013-46, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  4. Pierre L. Siklos, 2009. "As Good As It Gets? The International Dimension to Canada's Monetary Policy Strategy Choices," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 292, July.
  5. Hamza Bennani, 2013. "Does the ECB consider the persistence of inflation differentials?," Economics Bulletin, AccessEcon, vol. 33(3), pages 2129-2139.
  6. Pierre L. Siklos & Diana N. Weymark, 2011. "Data Revisions, Gradualism, and US Inflation Pressure in Real Time," Vanderbilt University Department of Economics Working Papers 1110, Vanderbilt University Department of Economics.
  7. Botzen, W.J. Wouter & Marey, Philip S., 2010. "Did the ECB respond to the stock market before the crisis?," Journal of Policy Modeling, Elsevier, vol. 32(3), pages 303-322, May.
  8. Andrew Swiston, 2011. "Official Dollarization As a Monetary Regime," IMF Working Papers 11/129, International Monetary Fund.
  9. Hamza Bennani, 2012. "National influences inside the ECB: an assessment from central bankers' statements," Working Papers hal-00992646, HAL.
  10. Andrew Hughes Hallett & Jan Libich & Petr Stehlik, 2009. "Financial Instability Prevention," CAMA Working Papers 2009-14, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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