An Empirical Comparison of Bundesbank and ECB Monetary Policy Rules

By Jon Faust, J. Rogers, Jonathan H. Wright. 2001

116 citations recorded by the source corpus.

We estimate a monetary policy reaction function for the Bundesbank and use it as a benchmark to assess the monetary policy of the ECB since the launch of the euro in January 1999. We find that euro interest rates are low relative to this benchmark. We consider several possible reasons for this, including the divergence between core and headline inflation, inflation having turned out to be higher than could have been foreseen by the ECB and the possibility that the ECB is focussing only on macroeconomic conditions in a subset of member countries. We argue that these potential explanations cannot account for the difference between recent interest rates and our estimated Bundesbank benchmark. Our results suggest that the reaction function of the ECB features a high weight on the output gap relative to the weight on inflation, compared to the Bundesbank.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/c6b5eb9858f01856ce6d3b7ced1d034685a890bb

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In Economics and Econometrics

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

Citations in the corpus

• How the ECB and the US Fed set interest rates (2007, methodology): “As far as the output gap specification is concerned, we strictly follow Clarida et al. (1998) and Faust et al. (2001) and finalize our analysis with the complementary use of monthly data.”
• Using Taylor Rules to Understand ECB Monetary Policy (2003, background): “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.”