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Money-based interest rate rules: lessons from German data

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  • Gerberding, Christina
  • Seitz, Franz
  • Worms, Andreas

Abstract

The paper derives the monetary policy reaction function implied by money growth targeting. It consists of an interest rate response to deviations of the inflation rate from target, to the change in the output gap, to money demand shocks and to the lagged interest rate. In the second part, it is shown that this type of inertial interest rate rule characterises the Bundesbank's monetary policy from 1979 to 1998 quite well. This result is robust to the use of real-time or ex post data and to the consideration of serially correlated errors. The main lesson is that, in addition to anchoring long-term inflation expectations, monetary targeting introduces inertia and history-dependence into the monetary policy rule. This is advantageous when private agents have forward-looking expectations and when the level of the output gap is subject to persistent measurement errors. --

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Bibliographic Info

Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2007,06.

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Date of creation: 2007
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Handle: RePEc:zbw:bubdp1:5560

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Keywords: Monetary policy; Taylor rule; money growth targets; history dependence;

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References

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Cited by:
  1. Jörg Döpke & Michael Funke & Sean Holly & Sebastian Weber, 2009. "The Cross-Section of Output and Inflation in a Dynamic Stochastic General Equilibrium Model with Sticky Prices," Discussion Papers of DIW Berlin 896, DIW Berlin, German Institute for Economic Research.
  2. Scharnagl, Michael & Gerberding, Christina & Seitz, Franz, 2007. "Simple interest rate rules with a role for money," Discussion Paper Series 1: Economic Studies 2007,31, Deutsche Bundesbank, Research Centre.
  3. Andreas Beyer & Vitor Gaspar & Christina Gerberding & Otmar Issing, 2008. "Opting Out of the Great Inflation: German Monetary Policy After the Break Down of Bretton Woods," NBER Working Papers 14596, National Bureau of Economic Research, Inc.
  4. Ernst Konrad, 2009. "The impact of monetary policy surprises on asset return volatility: the case of Germany," Financial Markets and Portfolio Management, Springer, vol. 23(2), pages 111-135, June.
  5. Beyer, Andreas & Gaspar, Vítor & Gerberding, Christina & Issing, Otmar, 2008. "Opting out of the great inflation: German monetary policy after the break down of Bretton Woods," CFS Working Paper Series 2009/01, Center for Financial Studies (CFS).

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