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Did the Revision of the ECB Monetary Policy Strategy Affect the Reaction Function?

  • Kai Carstensen
  • Roberta Colavecchio

In May 2003 the European Central Bank (ECB) announced the revision of its monetary policy strategy. Although the ECB stressed that the revision would not imply any fundamental change in their decisions, this remains to be verified empirically. Therefore, this paper tries to answer the question whether the strategy revision has induced a structural break in the ECB policy reaction function. To this end, we estimate several Taylor-type reaction functions and conduct a structural change analysis using both recursive parameter estimates and structural change tests. We find that the ECB has been following a stabilizing rule and that there is no clear-cut evidence in favor of a break after the revision, even though some signals of instability show up, particularly in June 2003.

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File URL: https://www.ifw-members.ifw-kiel.de/publications/did-the-revision-of-the-ecb-monetary-policy-strategy-affect-the-reaction-function-1/kap1221.pdf
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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1221.

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Length: 31 pages
Date of creation: Jul 2004
Date of revision:
Handle: RePEc:kie:kieliw:1221
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  8. Lars E. O. Svensson, 1997. "Inflation Targeting: Some Extensions," NBER Working Papers 5962, National Bureau of Economic Research, Inc.
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  18. Taylor, John B., 1998. "The Robustness and Efficiency of Monetary Policy Rules as Guidelines for Interest Rate Setting by the European Central Bank," Seminar Papers 649, Stockholm University, Institute for International Economic Studies.
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