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Asymmetric Reaction Functions for the Euro Area

Listed author(s):
  • Paolo Surico

This paper offers a preliminary evaluation of ECB conduct of monetary policy by estimating a fairly general reaction function for the euro area. The specification of the policy rule embodies a number of nonlinearities which are shown to stem from asymmetric preferences and a convex aggregate supply curve. Asymmetric preferences allow, but do not require, policy-makers to weight differently positive and negative deviations of inflation and output from the reference values, and translate into an asymmetric reaction function. The empirical analysis on monthly euro-area aggregated data over the last 5 years reveals that ECB monetary policy is effectively described by a nonlinear policy rule according to which output contractions have required a larger policy response than output expansions. Moreover, actual movements in the euro interest rate closely resemble the simulated path that a Bundesbank-type of behaviour would have implied. Copyright 2003, Oxford University Press.

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Article provided by Oxford University Press in its journal Oxford Review of Economic Policy.

Volume (Year): 19 (2003)
Issue (Month): 1 ()
Pages: 44-57

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Handle: RePEc:oup:oxford:v:19:y:2003:i:1:p:44-57
Contact details of provider: Web page: http://oxrep.oupjournals.org/

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  1. Dolado Juan & Pedrero Ramón María-Dolores & Ruge-Murcia Francisco J., 2004. "Nonlinear Monetary Policy Rules: Some New Evidence for the U.S," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 8(3), pages 1-34, September.
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  8. Alex Cukierman & Anton Muscatelli, 2001. "Do Central Banks have Precautionary Demands for Expansions and for Price Stability?," Working Papers 2002_4, Business School - Economics, University of Glasgow, revised Mar 2002.
  9. Favero, Carlo A & Rovelli, Riccardo, 2003. " Macroeconomic Stability and the Preferences of the Fed: A Formal Analysis, 1961-98," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 545-556, August.
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  12. Richard H. Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary policy rules in practice," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
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  15. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
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