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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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Abstract

This paper estimates standard and extended Taylor rules for core countries in the euro area, namely France, Germany and Italy, as well as for the ECB. We perform extensive tests for over-identifying restrictions and instrument relevance, a practice generally eschewed in previous work. We find that asset prices can be highly relevant as instruments rather than as separate arguments in policy rules. Forecast-based rules perform best using the root mean squared error metric but produce coefficients implying that central banks may be too aggressive at fighting inflation.

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File URL: http://www.wlu.ca/documents/22941/Siklos_Bohl_BBkII_March32006.pdf
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Bibliographic Info

Paper provided by Wilfrid Laurier University, Department of Economics in its series Working Papers with number eg0053.

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Length: 40
Date of creation: 2006
Date of revision: 2006
Handle: RePEc:wlu:wpaper:eg0053

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Keywords: Monetary policy reaction functions; asset prices; instruments; European Central Bank;

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Cited by:
  1. Neuenkirch, Matthias & Siklos, Pierre L., 2013. "What's in a second opinion? Shadowing the ECB and the Bank of England," European Journal of Political Economy, Elsevier, vol. 32(C), pages 135-148.
  2. 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.
  3. Andrew Hughes Hallett & Jan Libich & Petr Stehlík, 2011. "Macroprudential Policies and Financial Stability," The Economic Record, The Economic Society of Australia, vol. 87(277), pages 318-334, 06.
  4. Hamza Bennani, 2013. "Does the ECB consider the persistence of inflation differentials?," Economics Bulletin, AccessEcon, vol. 33(3), pages 2129-2139.
  5. Hamza Bennani, 2012. "National influences inside the ECB: an assessment from central bankers' statements," Working Papers hal-00992646, HAL.
  6. Andrew Swiston, 2011. "Official Dollarization As a Monetary Regime," IMF Working Papers 11/129, International Monetary Fund.
  7. 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.
  8. Pierre L. Siklos & Diana N. Weymark, 2008. "Data Revisions, Gradualism, and US Inflation Pressure in Real Time," Vanderbilt University Department of Economics Working Papers 0816, Vanderbilt University Department of Economics.
  9. 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.
  10. 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.

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