Some new results on interest rate rules in EMU and in the US

Doménech, Rafael; Ledo, Mayte; Taguas, David

doi:10.1016/s0148-6195(02)00092-9

Cited by 33 publications

(26 citation statements)

References 17 publications

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“…Since the seminal contribution of Taylor (1993), it has become common to describe interest rate setting in terms of a monetary policy reaction function, where the short-term nominal interest rate, representing the central bank's monetary policy instrument, responds to deviations of inflation and output from their targets. There are now quite a number of studies which estimate such a reaction function for the euro area (Gerlach and Schnabel 2000, Mihov 2001, Doménech et al 2002, Gerdesmeier and Roffia 2003, Clausen and Hayo 2005. All of these studies utilise synthetic aggregate data on macroeconomic variables and span a sample period going back at least to the mid-1980s.…”

Section: Empirical Set Up Econometric Methodology and Data Basementioning

confidence: 99%

Comparing Monetary Policy Reaction Functions: ECB versus Bundesbank

Hayo

Hofmann

2005

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Estimated monetary policy reaction functions for the Bundesbank (1979Bundesbank ( :4-1998) and the European Central Bank (1999Bank ( :1-2004 show that, while the ECB and the Bundesbank react similarly to expected inflation, the ECB reacts significantly stronger to the output gap. Terms of use: Documents inTheoretical considerations suggest that this stronger response to the output gap may rather be due to a higher interest rate sensitivity of the German output gap than to a higher weight given to output stabilisation by the ECB. Counterfactual simulations based on the estimated interest rate reaction functions suggest that German interest rates would not have been lower under a hypothetical Bundesbank regime after 1999. However, this conclusion crucially depends on the assumption of an unchanged long-run real interest rate for the EMU period. Adjusting the Bundesbank reaction function for the lower long-run real interest rate estimated for the ECB regime reverses this conclusion. JEL: E5

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Section: Empirical Set Up Econometric Methodology and Data Basementioning

confidence: 99%

Comparing Monetary Policy Reaction Functions: ECB versus Bundesbank

Hayo

Hofmann

2005

SSRN Journal

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“…Accordingly, most researchers study the ECB's monetary policy by estimating interest-rate reaction functions or Taylor rules, relating the economic situation of the euro area to observed interest rates. A number of studies estimate such an aggregate reaction function for the euro area (Gerlach and Schnabel, 2000, Mihov, 2001, Doménech et al, 2002, Fourçans and Vranceanu, 2004, Gerdesmeier and Roffia, 2004, Clausen and Hayo, 2005, Hayo and Hofmann, 2006, Gerlach, 2007. These studies differ substantially in terms of theoretical assumptions, empirical implementation, and, perhaps unsurprisingly, results.…”

Section: Similar Differences Have Been Documented For the Federal Resmentioning

confidence: 99%

Behind closed doors: Revealing the ECB's decision rule

Hayo

Méon

2013

Journal of International Money and Finance

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This paper aims at discovering the decision rule the Governing Council of the ECB uses to set interest rates. We construct a Taylor rule for each member of the council and for the euro area as a whole, and aggregate the interest rates they produce using several classes of decision-making mechanisms: chairman dominance, bargaining, consensus, voting, and voting with a chairman. We test alternative scenarios in which individual members of the council pursue either a national or a federal objective. We then compare the interest-rate path predicted by each scenario with the observed euro area's interest rate. We find that scenarios in which all members of the Governing Council are assumed to pursue Euro-area-wide objectives are dominated by scenarios in which decisions are made collectively by a council consisting of members pursuing national objectives. The best-performing scenario is the one in which individual members of the Governing Council follow national objectives, bargain over the interest rate, and their weights are based on their country's share of the zone's GDP. Behind closed doors: Revealing the ECB's Decision RuleAbstract: This paper aims at discovering the decision rule the Governing Council of the ECB uses to set interest rates. We construct a Taylor rule for each member of the council and for the euro area as a whole, and aggregate the interest rates they produce using several classes of decision-making mechanisms: chairman dominance, bargaining, consensus, voting, and voting with a chairman. We test alternative scenarios in which individual members of the council pursue either a national or a federal objective. We then compare the interest-rate path predicted by each scenario with the observed euro area's interest rate. We find that scenarios in which all members of the Governing Council are assumed to pursue Euro-area-wide objectives are dominated by scenarios in which decisions are made collectively by a council consisting of members pursuing national objectives. The best-performing scenario is the one in which individual members of the Governing Council follow national objectives, bargain over the interest rate, and their weights are based on their country's share of the zone's GDP.

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“…We follow Doménech et al (2002) in calibrating the parameters that enter the monetary policy reaction function γEMU and ρ r EMU . The weight of the Spanish economy in the euro-zone inflation, ω Sp, is set at 10%.…”

Section: Model Parameterizationmentioning

confidence: 99%

A rational expectations model for simulation and policy evaluation of the Spanish economy

Boscá

Díaz²,

Doménech

et al. 2010

SERIEs

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This paper presents the model used for simulation purposes within the Spanish Ministry of Economic Affairs and Finance. REMS (a Rational Expectations Model for the Spanish economy) is a small open economy dynamic general equilibrium model in the vein of the New-Neoclassical-Keynesian synthesis models, with a strongly micro-founded system of equations. In the long run REMS behaves in accordance with the neoclassical growth model. In the short run, it incorporates nominal, real and financial frictions. Real frictions include adjustment costs in consumption (via habits in consumption and rule-of-thumb households) and investment into physical capital. Due to financial frictions, there is no perfect arbitrage between different types of assets. The model also allows for slow adjustment in wages and price rigidities, which are specified through a Calvo-type Phillips curve. All these modelling choices are fairly in line with other existing models for the Spanish economy. One valuable contribution of REMS to the renewed vintage of D(S)GE models attempting to feature the Spanish economy is the specification of the labour market according to the search paradigm, which is best suited to assess the impact of welfare policies on both the intensive and extensive margins of employment. The model's most valuable asset is the rigour of the analysis of the transmission channels linking policy action with economic outcomes.

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Some new results on interest rate rules in EMU and in the US

Cited by 33 publications

References 17 publications

Comparing Monetary Policy Reaction Functions: ECB versus Bundesbank

Comparing Monetary Policy Reaction Functions: ECB versus Bundesbank

Behind closed doors: Revealing the ECB's decision rule

A rational expectations model for simulation and policy evaluation of the Spanish economy

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