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A Taylor Rule for the Euro Area Based on Quasi-Real Time Data

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Listed author(s):
  • Yvonne Adema

Abstract

One of the main criticisms on the original Taylor rule is the so-called real time critique; because data on especially the output gap are only available after some quarters the original Taylor rule is not operational. Moreover, Taylor rules estimated with ex post revised data could result in misleading descriptions of monetary policy. The aim of this paper is to develop a modified Taylor rule based on (quasi-)real time data for the euro area. We find that modified Taylor rules based on (quasi-)real time data and an interest rate smoothing term give a good description of monetary policy in the euro area during the 1994-2000 period. These Taylor rules could serve as indicators of the monetary stance in the euro area. But the forecasts of the interest rate obtained from the Taylor rules are too imprecise to get an exact interest rate forecast. Furthermore, actual monetary policy was more expansionary than what is expected of the estimated Taylor rules. We also find that using final data to estimate a Taylor rule, while in reality only (quasi-) real time data are available, does not lead to more misleading policy descriptions compared to using a Taylor rule estimated with (quasi-)real time data.

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File URL: https://www.dnb.nl/binaries/sr114_tcm46-146891.pdf
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Paper provided by Netherlands Central Bank in its series DNB Staff Reports (discontinued) with number 114.

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Length: 40 pages
Date of creation: 2004
Handle: RePEc:dnb:staffs:114
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Keywords: Taylor rule; Quas-Real Time Data; Euro Area;

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Find related papers by JEL classification:
  • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
  • 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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Cited by:

  1. Par Osterholm, 2005. "The Taylor rule and real-time data - a critical appraisal," Applied Economics Letters, Taylor & Francis Journals, vol. 12(11), pages 679-685.
  2. International Monetary Fund, 2005. "Inflation Targeting and Output Growth; Empirical Evidence for the European Union," IMF Working Papers 05/89, International Monetary Fund.
  3. Elmer Sterken, 2004. "The Role of the IFO Business Climate Indicator and Asset Prices in German Monetary Policy," CESifo Working Paper Series 1204, CESifo Group Munich.
  4. C.J.M. Kool, 2005. "What Drives ECB Monetary Policy?," Working Papers 05-03, Utrecht School of Economics.
  5. Ansgar Belke & Jens Klose, 2009. "Does the ECB Rely on a Taylor Rule?: Comparing Ex-post with Real Time Data," Discussion Papers of DIW Berlin 917, DIW Berlin, German Institute for Economic Research.
  6. Karsten Ruth, 2007. "Interest rate reaction functions for the euro area," Empirical Economics, Springer, vol. 33(3), pages 541-569, November.
  7. Ansgar Belke & Jens Klose, 2011. "Does the ECB Rely on a Taylor Rule During the Financial Crisis? Comparing Ex-post and Real Time Data with Real Time Forecasts," Economic Analysis and Policy, Elsevier, vol. 41(2), pages 147-171, September.
  8. Ruth, Karsten, 2004. "Interest rate reaction functions for the euro area Evidence from panel data analysis," Discussion Paper Series 1: Economic Studies 2004,33, Deutsche Bundesbank, Research Centre.

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