A Comparison Between the Fed and the ECB: Taylor Rules
AbstractThis paper analyzes whether Taylor-type policy rules can be used to describe the behavior of the Federal Reserve and the European Central Bank from the beginning of 1999 until mid 2002. Since there was no common monetary policy for the Euro area before 1999, we examine if the average Central Bank behavior of the countries forming the European Monetary Union can be approximated by a single reaction function. We compare the currency areas by searching for similarities and distinctions between the Taylor-type reaction functions of the two central banks. We pay particular attention to the possible influence of one central bank on the behavior of the other one. The simplest method to test this interdependence is to compare the two reaction functions and try to incorporate the decision variable of one central bank into the other central bank's reaction function. The estimations show that there are significant differences in the reaction functions of both central banks before and after 1999 and between the two central banks. The second result is that the Fed seems to influence the ECB but not vice versa. --
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Bibliographic InfoPaper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 03-19.
Date of creation: 2003
Date of revision:
ECB; Federal Reserve; monetary policy; Taylor rule;
Find related papers by JEL classification:
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
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