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Interest Rate Rules and Money as an Indicator Variable

Author

Listed:
  • Christina Gerberding

    (Deutsche Bundesbank, Economics Department, Wilhelm Epstein Str. 14, D-60431 Frankfurt)

  • Franz Seitz

    (University of Applied Sciences, Weiden, WSB Poznan, Hetzenrichter Weg 15, D-92637 Weiden)

  • Andreas Worms

    (Deutsche Bundesbank, Economics Department, Wilhelm Epstein Str. 14, D-60431 Frankfurt)

Abstract

The paper derives the monetary policy reaction function implied by using money as an indicator variable. It consists of an interest rate response to deviations of the inflation rate from target, to the change in the output gap, to money demand shocks and to the lagged interest rate. We show that this type of inertial interest rate rule characterises the Bundesbank’s monetary policy from 1979 to 1998 quite well. This result is robust to the use of real-time or ex post data. The main lesson is that, in addition to anchoring long-term inflation expectations, money introduces inertia and history-dependence into the monetary policy rule. This is advantageous when private agents have forward-looking expectations and when the level of the output gap is subject to persistent measurement errors.

Suggested Citation

  • Christina Gerberding & Franz Seitz & Andreas Worms, 2012. "Interest Rate Rules and Money as an Indicator Variable," Credit and Capital Markets, Credit and Capital Markets, vol. 45(4), pages 501-529.
  • Handle: RePEc:kuk:journl:v:45:y:2012:i:4:p:501-529
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    More about this item

    Keywords

    Monetary policy; Taylor rule; money growth targets; history dependence;

    JEL classification:

    • 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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