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Did the Bundesbank Follow a Taylor Rule? An Analysis Based on Real-Time Data

  • Jens R. Clausen

    ()

  • Carsten-Patrick Meier

    ()

Using a real-time data set for German GDP over the period from 1973 to 1998 we calculate various measures of real-time output gaps and use these to calibrate and estimate Taylor-type reaction functions for the Bundesbank. Most of the reaction functions we find fit the Bundesbank´s actual policy, as represented by the short-run interest rate, quite well. In contrast to previous findings based on ex post revised data for the output gap, we find the reaction coefficients to resemble quite closely those originally proposed by Taylor for some of our real-time measures of the output gap. Broad monetary aggregates such as M3, in contrast, only played a small role for the Bundesbank´s interest rate decisions. Given the good record of the Bundesbank in fighting inflation, the results give support for the use of the Taylor rule for monetary policy.

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Paper provided by Institute for Economic Policy, Cologne, Germany in its series IWP Discussion Paper Series with number 02/2003.

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Length: 29 pages
Date of creation: Aug 2003
Date of revision:
Handle: RePEc:kln:iwpdip:dp02/03
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  1. Clarida, R. & Gali, J. & Gertler, M., 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and some Theory," Working Papers 98-01, C.V. Starr Center for Applied Economics, New York University.
  2. Seitz, Franz & Brand, Claus & Reimers, Hans-Eggert, 2003. "Forecasting real GDP: what role for narrow money?," Working Paper Series 0254, European Central Bank.
  3. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
  4. Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
  5. Richard Clarida & Mark Gertler, 1996. "How the Bundesbank Conducts Monetary Policy," NBER Working Papers 5581, National Bureau of Economic Research, Inc.
  6. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
  7. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary policy rules in practice," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  8. Aoki, Kosuke, 2003. "On the optimal monetary policy response to noisy indicators," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 501-523, April.
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