Abstract
This paper analyses the interest rate-setting behaviour of the ECB and the former leading monetary authority in the Eurozone, the German Bundesbank, using Taylor rules in different GMM-estimation setups. The main findings are as follows: the Bundesbank was clearly stability oriented with regard to inflation and included output stabilization, interest rate smoothing and inflation forecasts in its decision-making process during the period under investigation, that is 1979M01-1998M12. Furthermore, evidence of the inclusion of the quantity of money in the decisions has been found at least for the 1980s. The estimation results for the ECB from 1999M01 onwards reveal a monetary policy that is less stability oriented than that of the Bundesbank in that it clearly violates the Taylor principle. According to this, the ECB cannot be seen as the successor of the Bundesbank as regards the way it has conducted monetary policy.
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Notes
While there is broad consensus concerning the smoothing parameter for quarterly data (1600), there is an ongoing discussion about the appropriate parameter for monthly data (Ravn and Uhlig 2002). Because of this, the alternative measure was used in the ECB estimations, since there is a high degree of uncertainty about the output gap, especially around the starting time of the financial crisis.
The ex-post data series were drawn using Thomson Reuters Datastream. The real-time series were drawn directly from the ECB homepage.
Empirical evidence of the Taylor principle can be found in Taylor (1999), where the Fed’s monetary policy from 1879 to 1997 is examined. The finding here is that periods in which the central bank fulfilled the Taylor principle were characterized by lower production and inflation volatilities.
The target interest rate follows the EURIBOR series closely, so for reasons of clarity it is not shown here.
In a recently published study by Hayo and Méon (2013) the authors report evidence of national influences on ECB monetary policy decisions through voting behaviour.
See, for example, Hayo (2007) for a similar approach.
Here, the forecast horizon of seven months is used, since this specification gave the best RMSC in the setup for Eq. (3) in this subsample.
The average money growth over the whole subsample was used as the target money growth rate.
I owe this point to an anonymous referee.
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Acknowledgments
The author would like to thank Joscha Beckmann, Ansgar Belke, Michael Stein, the editor, Robert M. Kunst, and two anonymous referees for helpful comments and suggestions. The author is responsible for any remaining errors.
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Rühl, T.R. Taylor rules revisited: ECB and Bundesbank in comparison. Empir Econ 48, 951–967 (2015). https://doi.org/10.1007/s00181-014-0820-z
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DOI: https://doi.org/10.1007/s00181-014-0820-z