Using Taylor Rules to Understand ECB Monetary Policy

By Stephan Sauer, Jan-Egbert Sturm. Social Science Research Network, 2003

152 citations recorded by the source corpus.

Over the last decade, the simple instrument policy rule developed by Taylor (1993) has become a popular tool for evaluating monetary policy of central banks. As an extensive empirical analysis of the ECB’s past behaviour still seems to be in its infancy, we estimate several instrument policy reaction functions for the ECB which might shed some light on actual monetary policy in the euro area in the recent past and answer questions like whether the ECB has actually followed a stabilising or a destabilising rule so far? Looking at contemporaneous Taylor rules, the presented evidence suggests that the ECB is accommodating changes in inflation and hence follows a destabilising policy. However, this impression seems to be largely due to the lack of a forward-looking perspective in such specifications. Either assuming rational expectations and using a forward-looking specification, or using expectations as derived from surveys result in Taylor rules which do imply a stabilising role of the ECB. The use of real-time industrial production data does not seem to play such a significant role as in the case of the U.S.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/3eb786ff2e09bd1daa594d024f8b7625e7fbe210

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In Economics and Econometrics

1. A. Belke
2. T. Wollmershaeuser
3. Thorsten Polleit
4. Jan-Egbert Sturm
5. Stephan Sauer
6. Axel Dreher

Citations in the corpus

• The Stress of Having a Single Monetary Policy in Europe (2008, methodology): “Finally, we produce an estimate of the actual policy weights the ECB has implicitly attached to each of the member countries.”
• Using Taylor Rules to Understand European Central Bank Monetary Policy (2007, methodology): “Over the last decade, the simple instrument policy rule developed by Taylor (1993) has become a popular tool for evaluating the monetary policy of central banks.”
• How the ECB and the US Fed set interest rates (2007, methodology): “Peersman and Smets (1998) and Smant (2002). § See, e.”
• Monetary Policy Inertia: Fact or Fiction? (2006, unknown): “12 Similar estimates are discussed by Kozicki (1999) and Rudebusch (2002b) for the United States and by Sauer and Sturm (2003) , Gerdesmeier and Roffia (2004), and Castelnuovo (2006) for the euro area.”