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Asset Prices as Indicators of Euro Area Monetary Policy: An Empirical Assessment of Their Role in a Taylor Rule

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Abstract

This paper estimates standard and extended Taylor rules for core countries in the euro area, namely France, Germany and Italy, as well as for the ECB. We perform extensive tests for over-identifying restrictions and instrument relevance, a practice generally eschewed in previous work. We find that asset prices can be highly relevant as instruments rather than as separate arguments in policy rules. Forecast-based rules perform best using the root mean squared error metric but produce coefficients implying that central banks may be too aggressive at fighting inflation.

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  • P. Siklos & M. Bohl, 2006. "Asset Prices as Indicators of Euro Area Monetary Policy: An Empirical Assessment of Their Role in a Taylor Rule," Working Papers eg0053, Wilfrid Laurier University, Department of Economics, revised 2006.
    • Handle: RePEc:wlu:wpaper:eg0053
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    Cited by:

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    2. Aleš Bulíř & Jan Vlček, 2023. "Monetary Policy is Not Always Systematic and Data-Driven: Evidence from the Yield Curve," Open Economies Review, Springer, vol. 34(1), pages 93-112, February.
    3. Andrew Hughes Hallett & Jan Libich & Petr Stehlík, 2011. "Macroprudential Policies and Financial Stability," The Economic Record, The Economic Society of Australia, vol. 87(277), pages 318-334, June.
    4. Botzen, W.J. Wouter & Marey, Philip S., 2010. "Did the ECB respond to the stock market before the crisis?," Journal of Policy Modeling, Elsevier, vol. 32(3), pages 303-322, May.
    5. Baxa, Jaromír & Horváth, Roman & Vašíček, Bořek, 2013. "Time-varying monetary-policy rules and financial stress: Does financial instability matter for monetary policy?," Journal of Financial Stability, Elsevier, vol. 9(1), pages 117-138.
    6. Hamza Bennani, 2012. "National influences inside the ECB: an assessment from central bankers' statements," Working Papers hal-00992646, HAL.
    7. Andrew Hughes Hallett & Jan Libich & Petr Stehlik, 2009. "Financial instability prevention," CAMA Working Papers 2009-14, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    8. Mr. Andrew J Swiston, 2011. "Official Dollarization As a Monetary Regime: Its Effectson El Salvador," IMF Working Papers 2011/129, International Monetary Fund.
    9. Chuku Chuku & Paul Middleditch, 2020. "Characterizing Monetary and Fiscal Policy Rules and Interactions when Commodity Prices Matter," Manchester School, University of Manchester, vol. 88(3), pages 373-404, June.
    10. Hamza Bennani, 2013. "Does the ECB consider the persistence of inflation differentials?," Economics Bulletin, AccessEcon, vol. 33(3), pages 2129-2139.
    11. Papadamou, Stephanos & Sidiropoulos, Moïse & Spyromitros, Eleftherios, 2017. "Does central bank independence affect stock market volatility?," Research in International Business and Finance, Elsevier, vol. 42(C), pages 855-864.
    12. Michael D. Bordo & Pierre L. Siklos, 2024. "The Importance of Sound Monetary Policy: Some Lessons for Today from Canada’s Experience with Floating Exchange Rates Since 1950," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 66(3), pages 415-453, September.
    13. Pierre L. Siklos, 2009. "As Good As It Gets? The International Dimension to Canada's Monetary Policy Strategy Choices," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 292, July.
    14. Richard C.K. Burdekin & King Banaian & Mark Hallerberg & Pierre L. Siklos, 2011. "Fiscal and monetary institutions and policies: onward and upward?," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 3(4), pages 340-354, November.
    15. Michael D. Bordo & Pierre Siklos, 2024. "The Importance of Sound Monetary Policy: Some Lessons for Today from Canada’s Experience with Floating Exchange Rates since 1950," Working Papers 320, Princeton University, Department of Economics, Center for Economic Policy Studies..
    16. Siklos, Pierre L., 2006. "Hungary's entry into the euro area: Lessons for prospective members from a monetary policy perspective," Economic Systems, Elsevier, vol. 30(4), pages 366-384, December.

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    More about this item

    Keywords

    Monetary policy reaction functions; asset prices; instruments; European Central Bank;
    All these keywords.

    JEL classification:

    • 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
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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