IDEAS home Printed from https://ideas.repec.org/p/wpa/wuwpma/0504032.html
   My bibliography  Save this paper

Comparing Monetary Policy Reaction Functions: ECB versus Bundesbank

Author

Listed:
  • Bernd Hayo

    (Philipps-University Marburg)

  • Boris Hofmann

    (ZEI, University of Bonn)

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.

Suggested Citation

  • Bernd Hayo & Boris Hofmann, 2005. "Comparing Monetary Policy Reaction Functions: ECB versus Bundesbank," Macroeconomics 0504032, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpma:0504032
    Note: Type of Document - pdf; pages: 23
    as

    Download full text from publisher

    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/mac/papers/0504/0504032.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
    2. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 147-180.
    3. Ilian Mihov, 2001. "Monetary policy implementation and transmission in the European Monetary Union," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 16(33), pages 370-406.
    4. Nelson, Charles R & Startz, Richard, 1990. "Some Further Results on the Exact Small Sample Properties of the Instrumental Variable Estimator," Econometrica, Econometric Society, vol. 58(4), pages 967-976, July.
    5. Stephen G. Cecchetti & Michael Ehrmann, 2002. "Does Inflation Targeting Increase Output Volatility?: An International Comparison of Policymakers' Preferences and Outcomes," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 9, pages 247-274, Central Bank of Chile.
    6. Benigno, Pierpaolo & Lopez-Salido, J. David, 2006. "Inflation Persistence and Optimal Monetary Policy in the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 587-614, April.
    7. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    8. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.
    9. Castelnuovo, Efrem, 2003. "Taylor rules, omitted variables, and interest rate smoothing in the US," Economics Letters, Elsevier, vol. 81(1), pages 55-59, October.
    10. Laurence Ball, 1999. "Efficient Rules for Monetary Policy," International Finance, Wiley Blackwell, vol. 2(1), pages 63-83, April.
    11. Favero, Carlo A & Rovelli, Riccardo, 2003. "Macroeconomic Stability and the Preferences of the Fed: A Formal Analysis, 1961-98," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 545-556, August.
    12. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 518-529, October.
    13. Efrem Castelnuovo & Paolo Surico, 2003. "What does Monetary Policy Reveal about a Central Bank's Preferences?," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 32(3), pages 335-359, November.
    14. Domenech, Rafael & Ledo, Mayte & Taguas, David, 2002. "Some new results on interest rate rules in EMU and in the US," Journal of Economics and Business, Elsevier, vol. 54(4), pages 431-446.
    15. Volker Clausen & Bernd Hayo, 2002. "Monetary Policy in the Euro Area - Lessons from the First Years," Macroeconomics 0205006, University Library of Munich, Germany.
    16. Angeloni,Ignazio & Kashyap,Anil K. & Mojon,Benoît (ed.), 2003. "Monetary Policy Transmission in the Euro Area," Cambridge Books, Cambridge University Press, number 9780521828642.
    17. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
    18. David F. Hendry & Hans-Martin Krolzig, 1999. "Improving on 'Data mining reconsidered' by K.D. Hoover and S.J. Perez," Econometrics Journal, Royal Economic Society, vol. 2(2), pages 202-219.
    19. Gerlach, Stefan & Schnabel, Gert, 2000. "The Taylor rule and interest rates in the EMU area," Economics Letters, Elsevier, vol. 67(2), pages 165-171, May.
    20. Gert Peersman, 2004. "The Transmission of Monetary Policy in the Euro Area: Are the Effects Different Across Countries?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(3), pages 285-308, July.
    21. Volker Clausen & Bernd Hayo, 2005. "Monetary policy in the Euro area – lessons from the first years," International Economics and Economic Policy, Springer, vol. 1(4), pages 349-364, January.
    22. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    23. Richard H. Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary policy rules in practice," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    24. Kashyap, Anil K. & Mojon, Benoît & Terlizzese, Daniele & Backé, Peter, 2002. "Monetary Transmission in the Euro Area : Where Do We Stand?," Working Paper Series 114, European Central Bank.
    25. Jinyong Hahn & Jerry Hausman, 2003. "Weak Instruments: Diagnosis and Cures in Empirical Econometrics," American Economic Review, American Economic Association, vol. 93(2), pages 118-125, May.
    26. Peersman, Gert & Smets, Frank, 2001. "The monetary transmission mechanism in the euro area: more evidence from VAR analysis," Working Paper Series 91, European Central Bank.
    27. Gerdesmeier, Dieter & Roffia, Barbara, 2003. "Empirical estimates of reaction functions for the euro area," Working Paper Series 206, European Central Bank.
    28. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bernd Hayo & Boris Hofmann, 2003. "Monetary Policy Reaction Functions: ECB versus Bundesbank," Macroeconomics 0312007, University Library of Munich, Germany.
    2. Stephan Sauer & Jan-Egbert Sturm, 2003. "Using Taylor Rules to Understand ECB Monetary Policy," CESifo Working Paper Series 1110, CESifo.
    3. Bernd Hayo, 2007. "Is European Monetary Policy Appropriate for the EMU Member Countries? A Counterfactual Analysis," Palgrave Macmillan Books, in: David Cobham (ed.), The Travails of the Eurozone, chapter 4, pages 67-94, Palgrave Macmillan.
    4. Clémentine Florens & Eric Jondeau & Hervé Le Bihan, 2001. "Assessing GMM Estimates of the Federal Reserve Reaction Function," Econometrics 0111003, University Library of Munich, Germany.
    5. Shigeyuki Hamori & Naoko Hamori, 2009. "Introduction of the Euro and the Monetary Policy of the European Central Bank," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 7169, January.
    6. Michael Arghyrou, 2009. "Monetary policy before and after the euro: evidence from Greece," Empirical Economics, Springer, vol. 36(3), pages 621-643, June.
    7. Nejla Adanur Aklan & Mehmet Nargelecekenler, 2008. "Taylor Rule in Practice: Evidence from Turkey," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 14(2), pages 156-166, May.
    8. Wieland, Volker & Wolters, Maik, 2013. "Forecasting and Policy Making," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 239-325, Elsevier.
    9. Caglayan, Mustafa & Jehan, Zainab & Mouratidis, Kostas, 2012. "Asymmetric monetary policy rules for open economies: Evidence from four countries," MPRA Paper 37401, University Library of Munich, Germany.
    10. Leith, Campbell & Malley, Jim, 2005. "Estimated general equilibrium models for the evaluation of monetary policy in the US and Europe," European Economic Review, Elsevier, vol. 49(8), pages 2137-2159, November.
    11. Stephan Sauer & Jan‐Egbert Sturm, 2007. "Using Taylor Rules to Understand European Central Bank Monetary Policy," German Economic Review, Verein für Socialpolitik, vol. 8(3), pages 375-398, August.
    12. Bernd Hayo & Pierre-Guillaume Méon, 2013. "Behind closed doors: Revealing the ECB’s decision rule," Post-Print CEB, ULB -- Universite Libre de Bruxelles, vol. 37, pages 135-160, October.
    13. Carlo Altavilla & Matteo Ciccarelli, 2009. "The Effects of Monetary Policy on Unemployment Dynamics under Model Uncertainty: Evidence from the United States and the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(7), pages 1265-1300, October.
    14. Luís, Pacheco, 2004. "Asset Prices and Monetary Policy in the Euro Area: a tentative model," MPRA Paper 6579, University Library of Munich, Germany.
    15. repec:kap:iaecre:v:14:y:2008:i:2:p:156-166 is not listed on IDEAS
    16. Moons, Cindy & Hellinckx, Kevin, 2019. "Did monetary policy fuel the housing bubble? An application to Ireland," Journal of Policy Modeling, Elsevier, vol. 41(2), pages 294-315.
    17. Zeno Rotondi & Giacomo Vaciago, 2007. "Lessons from the ECB Experience: Frankfurt Still Matters!," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 36(2), pages 147-170, July.
    18. William Martin & Robert Rowthorn, 2004. "Will Stability Last?," CESifo Working Paper Series 1324, CESifo.
    19. Ansgar Belke & Thorsten Polleit, 2007. "How the ECB and the US Fed set interest rates," Applied Economics, Taylor & Francis Journals, vol. 39(17), pages 2197-2209.
    20. Altavilla, Carlo & Ciccarelli, Matteo, 2009. "The effects of monetary policy on unemployment dynamics under model uncertainty: evidence from the US and the euro area," Working Paper Series 1089, European Central Bank.
    21. Ruth, Karsten, 2004. "Interest rate reaction functions for the euro area Evidence from panel data analysis," Discussion Paper Series 1: Economic Studies 2004,33, Deutsche Bundesbank.

    More about this item

    Keywords

    Taylor rule; monetary policy; ECB; Bundesbank;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpma:0504032. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: EconWPA (email available below). General contact details of provider: https://econwpa.ub.uni-muenchen.de .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.