Interest Rate Reaction Functions and the Taylor Rule in the Euro Area

By Petra Gerlach-Kristen. Social Science Research Network, 2003

180 citations recorded by the source corpus.

Traditional Taylor rules, which are estimated using a level specification linking the short-term interest rate to inflation and the output gap, are unstable when estimated on euro area data and forecast poorly out of sample. We present an alternative reaction function which takes the non-stationarity of the data into account. The estimated interest rate rule is stable and forecasts well. In contrast to the traditional Taylor rule, we find a significant role for the long rate, which we argue reflects shifts in the public's perception of the long-run inflation objective.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/b68a0502f809dd80028086baefeebb5646b430b4

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

1. Jan-Egbert Sturm
2. Stephan Sauer
3. Alvaro Angeriz
4. P. Arestis
5. Axel Dreher
6. Engelbert Stockhammer
7. Bruno Bonizzi
8. Eckhard Hein

In Finance

1. Alvaro Angeriz
2. Stephan Sauer
3. Jan-Egbert Sturm
4. P. Arestis
5. Bruno Bonizzi

Citations in the corpus

• Monetary Policy Inertia: Fact or Fiction? (2006, unknown): “For example, Gerlach-Kristen (2004) and Driffill et al. (2005) find evidence that proxies for financial stability concerns, such as a privatepublic credit spread, have explanatory power in the Taylor rule.”
• Using Taylor Rules to Understand European Central Bank Monetary Policy (2007, unknown): “See e.g. Clausen and Hayo (2002), Faust et al. (2001) and Smant (2002) for the first approach and e.g. Clausen and Hayo (2002) and Gerlach-Kristen (2003) for the latter.”
• Using Taylor Rules to Understand ECB Monetary Policy (2003, methodology): “3 See, e.g. Clausen and Hayo (2002), Faust et al. (2001), and Smant (2002) for the first approach and e.g. Clausen and Hayo (2002) and Gerlach-Kristen (2003) for the latter.”
• Taylor Rules for the ECB Using Expectations Data (2008, unknown): “In an earlier paper on the ECB, Gerlach-Kristen (2003) includes the long-term interest rate as an additional explanatory variable in her Taylor-rule model.”
• How the ECB and the US Fed set interest rates (2007, unknown): “4 See, e.g. Peersman and Smets (1998), Gerlach and Schnabel (2000), Clausen and Hayo (2002), Gerlach-Kristen (2003) and Ullrich (2003).”
• Monetary policy in the UK (2007, background): “Taylor rule regressions are likely to be inconsistently estimated, clearly implying that the estimated parameters cannot be meaningfully interpreted (see, also, Gerlach-Kristen, 2003 ).”