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How the European Central Bank decided its early monetary policy?

Listed author(s):
  • Jesus Garcia-Iglesias

The main goal of this paper is to detect the mechanisms that should rationally stimulate the decision making-policies of the European Central Bank (ECB). This is carried out under the framework of theoretical principles of interest rate rules. Firstly, we deduce a set of logically advisable guidelines for the strategy actually developed by this central bank. Then we contrast a wide set of hypotheses with reference to those variables the ECB takes into account on deciding its monetary policy, with a flexible treatment regarding the number of months of advance or delay in the explanatory variables. The results lead us to the conclusion that the ECB, besides adopting a smooth strategy, especially bears in mind the expected core inflation rate, with a reaction coefficient adjusted to that initially proposed by Taylor. The economic growth rate, though it has a significant positive coefficient, matters relatively little and is backward looking. Finally, we evaluate up to what point the behaviour of the ECB is assimilative to an inflation targeting framework, solving this question affirmatively.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/00036840500461931
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Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 39 (2007)
Issue (Month): 7 ()
Pages: 927-936

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Handle: RePEc:taf:applec:v:39:y:2007:i:7:p:927-936
DOI: 10.1080/00036840500461931
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  11. Keuk-Soo Kim & W. Douglas McMillin, 2003. "Estimating the effects of monetary policy shocks: does lag structure matter?," Applied Economics, Taylor & Francis Journals, vol. 35(13), pages 1515-1526.
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  18. Gerlach, Stefan & Schnabel, Gert, 2000. "The Taylor rule and interest rates in the EMU area," Economics Letters, Elsevier, vol. 67(2), pages 165-171, May.
  19. Wojciech Charemza & Daniela Hristova & Peter Burridge, 2005. "Is inflation stationary?," Applied Economics, Taylor & Francis Journals, vol. 37(8), pages 901-903.
  20. 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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  22. Fourcans, Andre & Vranceanu, Radu, 2004. "The ECB interest rate rule under the Duisenberg presidency," European Journal of Political Economy, Elsevier, vol. 20(3), pages 579-595, September.
  23. Estrella, Arturo & Mishkin, Frederic S., 1997. "Is there a role for monetary aggregates in the conduct of monetary policy?," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 279-304, October.
  24. Gerdesmeier, Dieter & Roffia, Barbara, 2003. "Empirical estimates of reaction functions for the euro area," Working Paper Series 206, European Central Bank.
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