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A Time-varying Indicator of Effective Monetary Policy Conservatism

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Author Info

  • Berlemann, Michael

    ()
    (Helmut Schmidt University, Hamburg)

  • Hielscher, Kai

    ()
    (Helmut Schmidt University, Hamburg)

Abstract

Based on an extended version of a time-inconsistency model of monetary policy we show that the degree of effective monetary policy conservatism can be uncovered by studying to what extent central banks react to real disturbances. By estimating central bank reaction functions in moving and overlapping intervals for the period of 1985 to 2007 using an ordered logit approach in a panel setting we derive a time-varying indicator of effective monetary policy conservatism for Canada, Sweden, the UK and the US. Employing this indicator we show that increasing effective conservatism tends to lower inflation without increasing the output gap. However, while a higher degree of effective conservatism does not result in lower inflation uncertainty the variance of the output gap tends to decrease.

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Bibliographic Info

Paper provided by Helmut Schmidt University, Hamburg in its series Working Paper with number 112/2011.

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Length: 36 pages
Date of creation: 01 Jun 2011
Date of revision:
Handle: RePEc:ris:vhsuwp:2011_112

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Keywords: central banking; monetary policy; conservatism; central bank independence; inflation;

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