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Monetary policy reaction functions: ECB versus Bundesbank

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  • Hayo, Bernd
  • Hofmann, Boris

Abstract

We estimate monetary policy reaction functions for the Bundesbank (1979:4-1998:12) and the European Central Bank (1999:1-2003:7). The Bundesbank regime can be characterised, both before and after German reunification, by an inflation weight of 1.2 and an output weight of 0.4. The estimates for the ECB are 1.2, and 1, respectively. Thus, the ECB, while reacting similarly to expected inflation, puts significantly more weight on stabilising the business cycle than the Bundesbank did. --

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Bibliographic Info

Paper provided by ZEI - Center for European Integration Studies, University of Bonn in its series ZEI Working Papers with number B 24-2003.

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Date of creation: 2003
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Handle: RePEc:zbw:zeiwps:b242003

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

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References

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  1. 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, Central Bank of Chile, 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.
  2. Castelnuovo, Efrem, 2003. "Taylor rules, omitted variables, and interest rate smoothing in the US," Economics Letters, Elsevier, Elsevier, vol. 81(1), pages 55-59, October.
  3. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 195-214, December.
  4. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0284, National Bureau of Economic Research, Inc.
  5. Gerlach, Stefan & Schnabel, Gert, 2000. "The Taylor rule and interest rates in the EMU area," Economics Letters, Elsevier, Elsevier, vol. 67(2), pages 165-171, May.
  6. Dieter Gerdesmeier & Barbara Roffia, 2004. "Empirical Estimates of Reaction Functions for the Euro Area," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), Swiss Society of Economics and Statistics (SSES), vol. 140(I), pages 37-66, March.
  7. Rafael Domenech & Mayte Ledo & David Taguas, 2000. "Some new results on interest rate rules in EMU and in the US," Working Papers, BBVA Bank, Economic Research Department 0002, BBVA Bank, Economic Research Department.
  8. Volker Clausen & Bernd Hayo, 2002. "Monetary Policy in the Euro Area - Lessons from the First Years," Macroeconomics, EconWPA 0205006, EconWPA.
  9. Ilian Mihov, 2001. "Monetary policy implementation and transmission in the European Monetary Union," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 16(33), pages 369-406, October.
  10. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary policy rules in practice," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Mar.
  11. Jinyong Hahn & Jerry Hausman, 2003. "Weak Instruments: Diagnosis and Cures in Empirical Econometrics," American Economic Review, American Economic Association, American Economic Association, vol. 93(2), pages 118-125, May.
  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, American Statistical Association, vol. 20(4), pages 518-29, October.
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Cited by:
  1. von Hagen, Jürgen & Hofmann, Boris, 2003. "Macroeconomic implications of low inflation in the euro area," ZEI Working Papers, ZEI - Center for European Integration Studies, University of Bonn B 29-2003, ZEI - Center for European Integration Studies, University of Bonn.
  2. Jakas, Vicente, 2011. "Theory and empirics of an affine term structure model applied to European data," MPRA Paper 36029, University Library of Munich, Germany.
  3. Arnold, Ivo J.M., 2006. "Optimal regional biases in ECB interest rate setting," European Journal of Political Economy, Elsevier, Elsevier, vol. 22(2), pages 307-321, June.
  4. P. Siklos & M. Bohl, 2006. "Asset Prices as Indicators of Euro Area Monetary Policy: An Empirical Assessment of Their Role in a Taylor Rule," Working Papers, Wilfrid Laurier University, Department of Economics eg0053, Wilfrid Laurier University, Department of Economics, revised 2006.
  5. Bernd Hayo & Pierre-Guillaume Méon, 2012. "Why Countries Matter for Monetary Policy Decision-Making in the ESCB," ULB Institutional Repository 2013/130369, ULB -- Universite Libre de Bruxelles.
  6. Gruener Hans Peter & Hayo Bernd & Hefeker Carsten, 2009. "Unions, Wage Setting and Monetary Policy Uncertainty," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 9(1), pages 1-25, October.
  7. Bohl, Martin T. & Siklos, Pierre L., 2005. "The Role of Asset Prices in Euro Area Monetary Policy: Specification and Estimation of Policy Rules and Implications for the European Central Bank," Working Paper Series, European University Viadrina Frankfurt (Oder), The Postgraduate Research Programme Capital Markets and Finance in the Enlarged Europe 2005,6, European University Viadrina Frankfurt (Oder), The Postgraduate Research Programme Capital Markets and Finance in the Enlarged Europe.
  8. C.J.M. Kool, 2005. "What Drives ECB Monetary Policy?," Working Papers, Utrecht School of Economics 05-03, Utrecht School of Economics.
  9. Eleftheriou, Maria, 2009. "Monetary policy in Germany: A cointegration analysis on the relevance of interest rate rules," Economic Modelling, Elsevier, Elsevier, vol. 26(5), pages 946-960, September.
  10. Dieter Nautz & Juliane Scharff, 2005. "Inflation and Relative Price Variability in a Low Inflation Country: Empirical Evidence for Germany," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 6(4), pages 507-523, November.
  11. 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, Research Centre.
  12. Karsten Ruth, 2007. "Interest rate reaction functions for the euro area," Empirical Economics, Springer, Springer, vol. 33(3), pages 541-569, November.

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