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A Speed Limit Monetary Policy Rule for the Euro Area

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  • Livio Stracca

Abstract

The main task of central banks is to set the level of short‐term nominal interest rates in reaction to economic developments, with the aim of achieving their statutory objectives (typically some combination of inflation and output variability). If agents are forward‐looking, central banks can achieve better macroeconomic outcomes by committing to follow a rule‐like behaviour. Against this background, the contribution of this paper is twofold. First, it estimates a small‐scale model of the euro area economy that can be used as a benchmark for the evaluation of different simple policy rules in the euro area economy. Second, it studies the performance of a relatively new type of rule, labelled ‘speed limit’ (SL), where the nominal interest rate reacts to the rate of growth in the output gap. The main conclusion of the study is that an SL policy performs remarkably well.

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  • Livio Stracca, 2007. "A Speed Limit Monetary Policy Rule for the Euro Area," International Finance, Wiley Blackwell, vol. 10(1), pages 21-41, March.
    • Handle: RePEc:bla:intfin:v:10:y:2007:i:1:p:21-41
    DOI: 10.1111/j.1468-2362.2007.00196.x
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    Cited by:

    1. Zeno Rotondi & Giacomo Vaciago, 2007. "Lessons from the ECB Experience: Frankfurt Still Matters!," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 36(2), pages 147-170, July.
    2. Michael Scharnagl & Christina Gerberding & Franz Seitz, 2010. "Should Monetary Policy Respond to Money Growth? New Results for the Euro Area," International Finance, Wiley Blackwell, vol. 13(3), pages 409-441, December.
    3. Vitale, Paolo, 2006. "A market microstructure analysis of foreign exchange intervention," Working Paper Series 629, European Central Bank.
    4. Maximo Camacho & Danilo Leiva-Leon & Gabriel Perez-Quiros, 2016. "Country Shocks, Monetary Policy Expectations and ECB Decisions. A Dynamic Non-linear Approach," Advances in Econometrics, in: Dynamic Factor Models, volume 35, pages 283-316, Emerald Group Publishing Limited.
    5. Taisuke Nakata & Sebastian Schmidt & Paul Yoo, 2018. "Speed Limit Policy and Liquidity Traps," IMES Discussion Paper Series 18-E-06, Institute for Monetary and Economic Studies, Bank of Japan.
    6. Fructuoso Borrallo Egea & Pedro del Río López, 2021. "Estrategia de política monetaria e inflación en Japón," Occasional Papers 2116, Banco de España.
    7. Brendon, Charles & Paustian, Matthias & Yates, Tony, 2013. "The pitfalls of speed-limit interest rate rules at the zero lower bound," Bank of England working papers 473, Bank of England.
    8. Filippo Gori, 2016. "Disentangling the Monetary Policy Stance," Bank of Lithuania Working Paper Series 27, Bank of Lithuania.
    9. Daniel Dias, 2006. "Measuring the Importance of the Uniform Nonsynchronization Hypothesis," Working Papers w200603, Banco de Portugal, Economics and Research Department.
    10. Fructuoso Borrallo Egea & Pedro del Río López, 2021. "Monetary policy strategy and inflation in Japan," Occasional Papers 2116, Banco de España.
    11. Bernhard Herz & Stefan Hohberger, 2013. "Fiscal Policy, Monetary Regimes and Current Account Dynamics," Review of International Economics, Wiley Blackwell, vol. 21(1), pages 118-136, February.
    12. Blake, Andrew P., 2012. "Determining optimal monetary speed limits," Economics Letters, Elsevier, vol. 116(2), pages 269-271.
    13. Gerberding, Christina & Seitz, Franz & Worms, Andreas, 2007. "Money-based interest rate rules: lessons from German data," Discussion Paper Series 1: Economic Studies 2007,06, Deutsche Bundesbank.

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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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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