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Assessing monetary rules performance across EMU countries

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  • Carlo Altavilla

    (KU Leuven, Belgium)

Abstract

The topic covered in this paper is the performance of different monetary policy rules used as guidelines in practical policy making. To this end, different rules are evaluated using alternative econometrics techniques. A comparative analysis is made of the ability of the rules to correspond to the historical central bank behaviour and of the volatility of output, inflation and interest rate changes that they imply. The study is conducted of the EMU countries. The results suggest that simple rules perform quite well and that the advantages obtained from adopting an optimal control-based rule are not so great. Moreover, the addition of a forward-looking dimension and of an interest rate smoothing term in the reaction function seems to improve the performance of the rules. Copyright © 2003 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/ijfe.199
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Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 8 (2003)
Issue (Month): 2 ()
Pages: 131-151

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Handle: RePEc:ijf:ijfiec:v:8:y:2003:i:2:p:131-151
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Find related papers by JEL classification:
  • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
  • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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  1. Bennett T. McCallum, 1999. "Analysis of the Monetary Transmission Mechanism: Methodological Issues," NBER Working Papers 7395, National Bureau of Economic Research, Inc.
  2. Svensson, Lars & Woodford, Michael, 2000. "Indicator Variables for Optimal Policy," Seminar Papers 688, Stockholm University, Institute for International Economic Studies.
  3. John B. Taylor, 1995. "The Monetary Transmission Mechanism: An Empirical Framework," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 11-26, Fall.
  4. Lars E. O. Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," NBER Working Papers 5797, National Bureau of Economic Research, Inc.
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  6. Bernanke, Ben S. & Gertler, Mark & Waston, Mark, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Working Papers 97-25, C.V. Starr Center for Applied Economics, New York University.
  7. Frank Smets, 1998. "Output gap uncertainty: does it matter for the Taylor rule?," BIS Working Papers 60, Bank for International Settlements.
  8. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  9. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
  10. Julio J. Rotemberg & Michael Woodford, 1998. "Interest-Rate Rules in an Estimated Sticky Price Model," NBER Working Papers 6618, National Bureau of Economic Research, Inc.
  11. Bennett T. McCallum, 2000. "The Present and Future of Monetary Policy Rules," NBER Working Papers 7916, National Bureau of Economic Research, Inc.
  12. Gerlach, Stefan & Schnabel, Gert, 1999. "The Taylor Rule and Interest Rates in the EMU Area," CEPR Discussion Papers 2271, C.E.P.R. Discussion Papers.
  13. Martin Eichenbaum & Charles Evans, 1992. "Some empirical evidence on the effects of monetary policy shocks on exchange rates," Working Paper Series, Macroeconomic Issues 92-32, Federal Reserve Bank of Chicago.
  14. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  15. Michael Woodford, 2000. "Pitfalls of Forward-Looking Monetary Policy," American Economic Review, American Economic Association, vol. 90(2), pages 100-104, May.
  16. Carlo Altavilla, 2000. "Measuring Monetary Policy Assymmetries across EMU Countries," Center for Economic Studies - Discussion papers ces0022, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  17. Andrew G. Haldane & Nicoletta Batini, 1998. "Forward-Looking Rules for Monetary Policy," NBER Working Papers 6543, National Bureau of Economic Research, Inc.
  18. Gert Schnabel & Stefan Gerlach, 1999. "The Taylor rule and interest rates in the EMU area: a note," BIS Working Papers 73, Bank for International Settlements.
  19. Stephen G. Cecchetti, 1997. "Central Bank Policy Rules: Conceptual Issues and Practical Considerations," NBER Working Papers 6306, National Bureau of Economic Research, Inc.
  20. Ugo Marani & Carlo Altavilla, 1999. "The Monetary Policy of the European Central Bank and the Euro-US Dollar Exchange Rate," Center for Economic Studies - Discussion papers ces9923, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  21. Fuhrer, Jeffrey C, 1997. "The (Un)Importance of Forward-Looking Behavior in Price Specifications," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 338-50, August.
  22. John B. Taylor, 1994. "The inflation/output variability trade-off revisited," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 21-24.
  23. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
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Cited by:

  1. Marc-Alexandre Sénégas, 2002. "La politique monétaire face à l'incertitude : un survol méthodologique des contributions relatives à la zone euro," Revue d'Économie Financière, Programme National Persée, vol. 65(1), pages 177-200.
  2. Altavilla, Carlo & Ciccarelli, Matteo, 2009. "The effects of monetary policy on unemployment dynamics under model uncertainty: evidence from the US and the euro area," Working Paper Series 1089, European Central Bank.
  3. Orlowski, Lucjan T., 2010. "Monetary policy rules for convergence to the Euro," Economic Systems, Elsevier, vol. 34(2), pages 148-159, June.
  4. Juha Kilponen & Marc-Alexandre Sénégas & Jouko Vilmunen, 2007. "Bayesian versus robust control approach towards parameter uncertainty in monetary policymaking: how close are the outcomes? Some illustrating evidence from the EMU economies," Money Macro and Finance (MMF) Research Group Conference 2006 113, Money Macro and Finance Research Group.
  5. Ho-Chuan Huang & Shu-Chin Lin, 2006. "Time-varying discrete monetary policy reaction functions," Applied Economics, Taylor & Francis Journals, vol. 38(4), pages 449-464.
  6. António Afonso & Raquel Balhote, 2014. "Interactions between Monetary Policy and Fiscal Policy," Working Papers Department of Economics 2014/13, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  7. Campbell Leith & Simon Wren-Lewis, 2002. "Taylor Rules in the Open Economy," Working Papers 2002_14, Business School - Economics, University of Glasgow.
  8. Eleftheriou, Maria & Gerdesmeier, Dieter & Roffia, Barbara, 2006. "Monetary policy rules in the pre-EMU era: Is there a common rule?," Working Paper Series 0659, European Central Bank.
  9. Carlo Altavilla & Matteo Ciccarelli, 2008. "Inflation models, optimal monetary policy and uncertain unemployment dynamics: Evidence from the US and the euro area," Discussion Papers 8_2008, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.

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