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Are public preferences reflected in monetary policy reaction functions?

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  • Neuenkirch, Matthias

Abstract

In this paper, we test whether public preferences for price stability (obtained from the Eurobarometer survey) were actually reflected in the interest rates set by eight central banks. We estimate augmented Taylor (1993) rules for the period 1976Q2–1994Q1 using the dynamic GMM estimator. We find, first, that interest rates did reflect society’s preferences since the central banks raised rates when society’s inflation aversion was above its long-run trend. Second, the reaction to inflation is was non-linearly increasing in the degree of inflation aversion. Third, this emphasis on fighting inflation did not have a detrimental effect on output stabilization. We conclude with some implications concerning the democratic legitimation of central banks.

Suggested Citation

  • Neuenkirch, Matthias, 2014. "Are public preferences reflected in monetary policy reaction functions?," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 60-68.
  • Handle: RePEc:eee:jmacro:v:40:y:2014:i:c:p:60-68
    DOI: 10.1016/j.jmacro.2014.02.009
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    Cited by:

    1. Malte Hübner & Marcus Klemm, 2015. "Preferences over inflation and unemployment in Europe: a north–south divide?," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 62(4), pages 319-335, December.
    2. Hübner, Malte & Vannoorenberghe, Gonzague, 2015. "Patience and Inflation," MPRA Paper 65811, University Library of Munich, Germany.

    More about this item

    Keywords

    Central bank; Democratic legitimation; Eurobarometer; Inflation aversion; Monetary policy; Public preferences;

    JEL classification:

    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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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