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The relevance of real-time data in estimating reaction functions for the Euro area

Listed author(s):
  • Gerdesmeier, Dieter
  • Roffia, Barbara

This paper tackles the issue of the incompleteness of information available to the central bank when taking its monetary policy decisions. It is focused on euro area data and based on the simplistic assumption of the central bank following a simple monetary policy rule à-la-Taylor. Along the lines of the work by Orphanides (2001), our aim is to assess whether estimates of reaction functions which are carried out using revised data for the euro area can be misleading. In essence, the analysis yields indications which are consistent with the findings by Orphanides for the United States. First of all, the results found suggest that it would be preferable for a central bank not to attach too much weight on output gap measures in policy analysis, given that such measures are subject to large revisions over time. Moreover, the coefficients of a simple Taylor rule estimated in real time differ quite considerably from those related to the same rule estimated on the basis of ex post revised data. More precisely, a coefficient for inflation larger than one (which is a requirement for a unique equilibrium in many theoretical models) in real time is found only in case a forward-looking specification based on the Survey of Professional Forecasters is used. On the contrary, when using revised data, the same result is obtained if the Taylor rules include the current inflation rate. This shows how a misleading inference can occur when the appropriate available data are not taken into account.

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Paper provided by Frankfurt School of Finance and Management in its series Frankfurt School - Working Paper Series with number 56.

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Date of creation: 2004
Handle: RePEc:zbw:fsfmwp:56
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  1. Lawrence J. Christiano & Terry J. Fitzgerald, 2003. "The Band Pass Filter," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 435-465, 05.
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  5. Gunter Coenen & Andrew T. Levin & Volker W. Wieland, 2001. "Data uncertainty and the role of money as an information variable for monetary policy," Finance and Economics Discussion Series 2001-54, Board of Governors of the Federal Reserve System (U.S.).
  6. Dieter Gerdesmeier & Barbara Roffia, 2004. "Empirical Estimates of Reaction Functions for the Euro Area," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 140(I), pages 37-66, March.
  7. Athanasios Orphanides & Simon van Norden, 2002. "The Unreliability of Output-Gap Estimates in Real Time," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 569-583, November.
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  14. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," Working Papers 97-32, C.V. Starr Center for Applied Economics, New York University.
  15. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
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  17. Chow, Gregory C & Lin, An-loh, 1971. "Best Linear Unbiased Interpolation, Distribution, and Extrapolation of Time Series by Related Series," The Review of Economics and Statistics, MIT Press, vol. 53(4), pages 372-375, November.
  18. Glenn D. Rudebusch, 2001. "Term structure evidence on interest rate smoothing and monetary policy inertia," Working Paper Series 2001-02, Federal Reserve Bank of San Francisco.
  19. Gerdesmeier, Dieter & Roffia, Barbara, 2004. "Taylor rules for the euro area: the issue of real-time data," Discussion Paper Series 1: Economic Studies 2004,37, Deutsche Bundesbank, Research Centre.
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  21. Athanasios Orphanides, 2003. "Historical monetary policy analysis and the Taylor rule," Finance and Economics Discussion Series 2003-36, Board of Governors of the Federal Reserve System (U.S.).
  22. Claus Brand & Dieter Gerdesmeier & Barbara Roffia, 2002. "Estimating the trend of M3 income velocity underlying the reference value for monetary growth," Occasional Paper Series 03, European Central Bank.
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