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Comparing Monetary Policy Reaction Functions: ECB versus Bundesbank

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  • 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.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0504032.

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Length: 23 pages
Date of creation: 25 Apr 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0504032

Note: Type of Document - pdf; pages: 23
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Web page: http://128.118.178.162

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Keywords: Taylor rule; monetary policy; ECB; Bundesbank;

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References

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Citations

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Cited by:
  1. Zeno Rotondi & Giacomo Vaciago, 2007. "Lessons from the ECB experience: Frankfurt still matters!," DISCE - Quaderni dell'Istituto di Economia e Finanza ief0070, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  2. Alexandra Lopes, 2006. "The Costs of EMU for Transition Countries," Computing in Economics and Finance 2006 149, Society for Computational Economics.
  3. Bernd Hayo, 2006. "de Haan, J., Eijfinger, S., and Waller, S.: The European Central Bank, Credibility, Transparency, and Centralization," Journal of Economics, Springer, vol. 87(2), pages 200-204, 03.
  4. Jan-Egbert Sturm & Timo Wollmershäuser, 2008. "The Stress of Having a Single Monetary Policy in Europe," KOF Working papers 08-190, KOF Swiss Economic Institute, ETH Zurich.
  5. Lee, Jim, 2009. "Evaluating monetary policy of the euro area with cross-country heterogeneity: Evidence from a New Keynesian model," Economic Systems, Elsevier, vol. 33(4), pages 325-343, December.
  6. Kitov, Ivan, 2007. "Exact prediction of inflation and unemployment in Germany," MPRA Paper 5088, University Library of Munich, Germany.
  7. Michael Arghyrou, 2009. "Monetary policy before and after the euro: evidence from Greece," Empirical Economics, Springer, vol. 36(3), pages 621-643, June.
  8. Janko Gorter & Jan Jacobs & Jakob de Haan, 2007. "Taylor Rules for the ECB using Consensus Data," DNB Working Papers 160, Netherlands Central Bank, Research Department.
  9. Mykhaylova, Olena, 2009. "Welfare implications of country size in a monetary union," MPRA Paper 23323, University Library of Munich, Germany.
  10. Bernd Hayo, 2006. "Is European Monetary Policy Appropriate for the EMU Member Countries? A Counterfactual Analysis," Marburg Working Papers on Economics 200610, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  11. Bernd Hayo & Pierre-Guillaume Méon, 2011. "Behind closed doors: Revealing the ECB’s Decision Rule," MAGKS Papers on Economics 201135, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  12. 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.
  13. Marcus Drometer & Thomas Siemsen & Sebastian Watzka, 2013. "The Monetary Policy of the ECB: A Robin Hood Approach?," CESifo Working Paper Series 4178, CESifo Group Munich.
  14. Lee , Jim & Crowley, Patrick M, 2009. "Evaluating the stresses from ECB monetary policy in the euro area," Research Discussion Papers 11/2009, Bank of Finland.
  15. Arghyrou, Michael G. & Gadea, Maria Dolores, 2012. "The single monetary policy and domestic macro-fundamentals: Evidence from Spain," Journal of Policy Modeling, Elsevier, vol. 34(1), pages 16-34.
  16. Arghyrou, Michael G & Gregoriou, Andros & Kontonikas, Alexandros, 2007. "Do real interest rates converge? Evidence from the European Union," Cardiff Economics Working Papers E2007/26, Cardiff University, Cardiff Business School, Economics Section.

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