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Assessing Monetary Rules Performance across EMU Countries

  • Carlo Altavilla

    ()

    (K.U.Leuven, C.E.S., International Economics)

The topic covered in this paper is the performance of different monetary policy rules thought to be used as a guideline in practical policymaking. In this respect, different rules are estimated using alternative econometrics techniques. A comparative analysis based on the ability of the rules in capturing the historical central banks' behaviour and on the volatility on the output, inflation and interest rate changes that they imply is performed. The study is conducted on the EMU countries. The results suggest that the simple rules perform quite well and that the gains obtained from adopting an optimal control-based rule are not so large. Moreover the addition of a forward-looking dimension and of an interest rate smoothing term in the reaction function seems to improve the performance of the rules.

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File URL: http://www.econ.kuleuven.ac.be/ew/admin/Publications/Dps0108.pdf
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Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics in its series International Economics Working Papers Series with number ces0108.

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Length: 33 pages
Date of creation: Mar 2001
Date of revision:
Handle: RePEc:kul:kulwps:ces0108
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  1. repec:ete:ceswps:ces0022 is not listed on IDEAS
  2. Ben S. Bernanke & Mark Gertler & Mark Watson, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 91-157.
  3. Bennett T. McCallum, 1999. "Analysis of the Monetary Transmission Mechanism: Methodological Issues," NBER Working Papers 7395, National Bureau of Economic Research, Inc.
  4. Svensson, Lars E. O. & Woodford, Michael, 2000. "Indicator variables for optimal policy," Working Paper Series 0012, European Central Bank.
  5. 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.
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  7. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
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  9. Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers 638, Stockholm University, Institute for International Economic Studies.
  10. Martin Eichenbaum & Charles L. Evans, 1993. "Some Empirical Evidence on the Effects of Monetary Policy Shocks on Exchange Rates," NBER Working Papers 4271, National Bureau of Economic Research, Inc.
  11. Andrew G. Haldane & Nicoletta Batini, 1998. "Forward-Looking Rules for Monetary Policy," NBER Working Papers 6543, National Bureau of Economic Research, Inc.
  12. John B. Taylor, 1994. "The inflation/output variability trade-off revisited," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 21-24.
  13. McCallum, Bennett T, 2000. "The Present and Future of Monetary Policy Rules," International Finance, Wiley Blackwell, vol. 3(2), pages 273-86, July.
  14. Jeffrey C. Fuhrer, 1995. "The [un]importance of forward-looking behavior in price specifications," Working Papers 95-6, Federal Reserve Bank of Boston.
  15. Stephen G. Cecchetti, 1997. "Central Bank Policy Rules: Conceptual Issues and Practical Considerations," NBER Working Papers 6306, National Bureau of Economic Research, Inc.
  16. Lars E. O. Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," NBER Working Papers 5797, National Bureau of Economic Research, Inc.
  17. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  18. Julio J. Rotemberg & Michael Woodford, 1999. "Interest Rate Rules in an Estimated Sticky Price Model," NBER Chapters, in: Monetary Policy Rules, pages 57-126 National Bureau of Economic Research, Inc.
  19. Gert Schnabel & Stefan Gerlach, 1999. "The Taylor rule and interest rates in the EMU area: a note," BIS Working Papers 73, Bank for International Settlements.
  20. Michael Woodford, 2000. "Pitfalls of Forward-Looking Monetary Policy," American Economic Review, American Economic Association, vol. 90(2), pages 100-104, May.
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  22. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  23. Frank Smets, 2002. "Output gap uncertainty: Does it matter for the Taylor rule?," Empirical Economics, Springer, vol. 27(1), pages 113-129.
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