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The EBC Monetary Policy and its Taylor-type Reaction Function

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  • Kai Carstensen
  • Roberta Colavecchio

Abstract

In this paper we review and estimate Taylor-type reaction functions of the ECB for the first five years of EMU. We find economically plausible specifications indicating that the ECB has attached a large and stabilizing weight to inflation but no significant weight to money growth. This result supports the view that the ECB strives to maintain low inflation, but contradicts the claim made by the ECB that the monetary pillar is of particular importance. In a further step, we analyse the structural stability of the estimated reaction functions. While a recursive analysis indicates some signs of instability in June 2003, which almost coincides with the strategy revision of the ECB announced in May 2003, it is difficult to verify this by means of formal statistical tests. Overall, the estimation and test results indicate that reaction functions with survey indicators as explanatory variables have plausible inflation and output gap weights and show least evidence of instability.

Suggested Citation

  • Kai Carstensen & Roberta Colavecchio, 2006. "The EBC Monetary Policy and its Taylor-type Reaction Function," Rivista italiana degli economisti, Società editrice il Mulino, issue 1, pages 51-86.
    • Handle: RePEc:mul:jqat1f:doi:10.1427/23295:y:2006:i:1:p:51-86
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    Cited by:

    1. Riccardo Cristadoro & Giuseppe Saporito & Fabrizio Venditti, 2013. "Forecasting inflation and tracking monetary policy in the euro area: does national information help?," Empirical Economics, Springer, vol. 44(3), pages 1065-1086, June.
    2. Jan-Egbert Sturm & Timo Wollmershäuser, 2008. "The Stress of Having a Single Monetary Policy in Europe," CESifo Working Paper Series 2251, CESifo.

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