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Effective monetary policy conservatism: A comparison of 11 OECD countries

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  • Berlemann, Michael
  • Hilscher, Kai

Abstract

Modern monetary economists argue that institutional aspects such as central bank independence and central bank conservatism play an important role for the performance of an economy. In order to be able to compare the effects of different institutions it is necessary to measure both central bank independence and conservatism. In this paper we propose a new methodology of uncovering the degree of effective monetary policy conservatism from observed central bank behavior. Employing a variant of the Barro-Gordon-model we derive an optimal prime rate reaction function and show that more effectively conservative monetary policy tends to react less active to shocks to the real economy. In order to illustrate the proposed methodology we then estimate a common prime rate reaction function for a sample of 11 central banks in a panel setting and allow the reaction to real disturbances to differ between countries.

Suggested Citation

  • Berlemann, Michael & Hilscher, Kai, 2010. "Effective monetary policy conservatism: A comparison of 11 OECD countries," HWWI Research Papers 2-21, Hamburg Institute of International Economics (HWWI).
  • Handle: RePEc:zbw:hwwirp:2-21
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    References listed on IDEAS

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    Cited by:

    1. Hefeker, Carsten & Zimmer, Blandine, 2011. "The optimal choice of central bank independence and conservatism under uncertainty," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 595-606.
    2. Carsten Hefeker & Blandine Zimmer, 2010. "Central bank independence and conservatism under uncertainty: Substitutes or complements?," Volkswirtschaftliche Diskussionsbeiträge 140-10, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.

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    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa

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