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A taylor rule for the euro area based on quasi-real time data

  • Y. Adema

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. Further on, 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: http://www.dnb.nl/binaries/wo0738_tcm46-146024.pdf
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Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 738.

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Length: 41 pages
Date of creation: Oct 2003
Date of revision:
Handle: RePEc:dnb:wormem:738
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Web page: http://www.dnb.nl/en/
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