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Taylor Rules And Interest Rate Smoothing In The Euro Area

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  • EFREM CASTELNUOVO

Abstract

Conventional wisdom suggests that central banks implement monetary policy in a gradual fashion. Some researchers claim that this gradualism is due to 'optimal cautiousness'; in contrast, Rudebusch (Journal of Monetary Economics, Vol. 49 (2002), pp. 1161-1187) states that the observed policy rate sluggishness is mainly due to serially correlated exogenous shocks. In this paper we use models in first differences to assess the 'endogenous' versus 'exogenous' gradualism hypothesis for the Euro area. Our results suggest that the joint formalization of the two hypotheses is likely to offer the best simple approximation of the Euro area monetary policy conduct. Copyright © 2007 The Author; Journal compilation © 2007 Blackwell Publishing Ltd and The University of Manchester.

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  • Efrem Castelnuovo, 2007. "Taylor Rules And Interest Rate Smoothing In The Euro Area," Manchester School, University of Manchester, vol. 75(1), pages 1-16, January.
  • Handle: RePEc:bla:manchs:v:75:y:2007:i:1:p:1-16
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    1. Thomas Mayer, 2003. "The macroeconomic Loss Function: a Critical Note," Applied Economics Letters, Taylor & Francis Journals, vol. 10(6), pages 347-349.
    2. Gabriel Srour, 2001. "Why Do Central Banks Smooth Interest Rates?," Staff Working Papers 01-17, Bank of Canada.
    3. Mishkin, Frederic S., 1998. "International Experiences With Different Monetary Policy Regimes," Seminar Papers 648, Stockholm University, Institute for International Economic Studies.
    4. Stephan Sauer & Jan-Egbert Sturm, 2003. "Using Taylor Rules to Understand ECB Monetary Policy," CESifo Working Paper Series 1110, CESifo Group Munich.
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