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Are Public Preferences Reflected in Monetary Policy Reaction Functions?

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  • Matthias Neuenkirch

    (University of Aachen)

Abstract

In this paper, we test whether public preferences for price stability (obtained from the Eurobarometer survey) are actually reflected in the interest rates set by eight central banks. We estimate augmented Taylor (1993) rules for the period 1976-1993 using the dynamic GMM estimator. We find, first, that interest rates do reflect society's preferences since the central banks raise rates when society's inflation aversion is above its long-run trend. Second, the reaction to inflation is non-linearly increasing in the degree of inflation aversion. Third, this emphasis on fighting inflation does not have a detrimental effect on output stabilization. We conclude with some implications concerning the democratic legitimation of central banks.

Suggested Citation

  • Matthias Neuenkirch, 2013. "Are Public Preferences Reflected in Monetary Policy Reaction Functions?," MAGKS Papers on Economics 201321, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    • Handle: RePEc:mar:magkse:201321
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    Cited by:

    1. Malte Hübner & Marcus Klemm, 2015. "Preferences over inflation and unemployment in Europe: a north–south divide?," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 62(4), pages 319-335, December.
    2. Hyunwoo Kim, 2023. "The microfoundation of macroeconomic populism: The effects of economic inequality on public inflation aversion," Economics and Politics, Wiley Blackwell, vol. 35(1), pages 65-96, March.
    3. Hübner, Malte & Vannoorenberghe, Gonzague, 2015. "Patience and Inflation," MPRA Paper 65811, University Library of Munich, Germany.
    4. Abdul RASHID & Farah WAHEED, 2021. "Forward-Backward-Looking Monetary Policy Rules: Derivation and Empirics," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 71-92, December.

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    More about this item

    Keywords

    Central Bank; Democratic Legitimation; Eurobarometer; Inflation Aversion; Monetary Policy; Public Preferences; Taylor Rules.;
    All these keywords.

    JEL classification:

    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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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