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A Comparison Between the Fed and the ECB: Taylor Rules

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  • Ullrich, Katrin

Abstract

This 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 Info

Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 03-19.

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Date of creation: 2003
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Handle: RePEc:zbw:zewdip:962

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Keywords: ECB; Federal Reserve; monetary policy; Taylor rule;

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  1. 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.
  2. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers, Michigan State - Econometrics and Economic Theory 8905, Michigan State - Econometrics and Economic Theory.
  3. Gerlach, Stefan & Schnabel, Gert, 1999. "The Taylor Rule and Interest Rates in the EMU Area," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2271, C.E.P.R. Discussion Papers.
  4. Florens, C. & Jondeau, E. & Le Bihan, H., 2001. "Assessing GMM Estimates of the Federal Reserve Reaction Function," Working papers, Banque de France 83, Banque de France.
  5. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, Elsevier, vol. 42(6), pages 1033-1067, June.
  6. Clausen, Volker & Hayo, Bernd, 2002. "Monetary policy in the Euro area: Lessons from the first years," ZEI Working Papers B 09-2002, ZEI - Center for European Integration Studies, University of Bonn.
  7. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, American Economic Association, vol. 91(4), pages 964-985, September.
  8. James G. MacKinnon, 1995. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Working Papers, Queen's University, Department of Economics 918, Queen's University, Department of Economics.
  9. Giannone, Domenico & Reichlin, Lucrezia & Sala, Luca, 2002. "Tracking Greenspan: Systematic and Unsystematic Monetary Policy Revisited," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3550, C.E.P.R. Discussion Papers.
  10. Lars E. O. Svensson, 2003. "What is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," NBER Working Papers 9421, National Bureau of Economic Research, Inc.
  11. Rudebusch, Glenn D., 2002. "Term structure evidence on interest rate smoothing and monetary policy inertia," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(6), pages 1161-1187, September.
  12. Marvin Goodfriend, 1990. "Interest rates and the conduct of monetary policy," Working Paper, Federal Reserve Bank of Richmond 90-06, Federal Reserve Bank of Richmond.
  13. Sharon Kozicki, 1999. "How useful are Taylor rules for monetary policy?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-33.
  14. Bergin, Paul R. & Jorda, Oscar, 2004. "Measuring monetary policy interdependence," Journal of International Money and Finance, Elsevier, Elsevier, vol. 23(5), pages 761-783, September.
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