Does one size fit all? A Taylor-rule based analysis of monetary policy for current and future EMU members
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This paper uses the Taylor rule to examine the appropriateness of ECB interest rate policy for the initial EMU members and the ten new EMU member states some of whom are expected to join the Eurozone in 2006-7. Specifically it addresses three questions. (1) Are there differences between the interest rate aggregated from the Taylor interest rates of individual member states in the euro area and the interest rate set by the ECB? (2) For which countries do the desired interest rates according to the original Taylor rule and the interest rate of the euro area differ most and in which respect? (3) The last question is whether the interest rate gaps change over time. We find that the ECB’s policy does not fit individual EMU members equally well and this result is unlikely to be changed with the addition of the ten new members, which will have only a marginal effect on the ECB interest rate stance.Keywords:
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The belief that the European Central Bank (ECB) follows the US Federal Reserve (the Fed) in setting its policy is so entrenched with market participants and commentators that the search for empirical support would seem to be a trivial task. However, this is not the case. We find that the ECB is indeed often influenced by the Fed, but the reverse is true at least as often if one considers longer sample periods. There is empirically little support for the proposition that there has for a long time been a systematic asymmetric leader-follower relationship between the ECB and the Fed. Only after September 2001 is there more evidence of such an asymmetry. There is a clear-cut structural break between the period pre-economic and monetary union (EMU) and EMU itself in terms of the relationship between short-term interest rates on both sides of the Atlantic.
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The official view on ECB monetary policy claims that monetary decisions are based solely on average data for the euro zone and that diverging regional developments are disregarded. However, experience from other two tier central banks and theoretical considerations suggest that this official view cannot be accepted without empirical testing. A generalised monetary policy reaction function is developed which allows for an influence of regional divergence. The empirical tests are based on reaction function estimations and a probit model of interest rate decisions for the first years of the euro area. The results offer some first weak support for an impact of regional divergence in ECB decision making. The results further clarify that ignoring a potential national perspective may lead to a serious bias in the estimation of ECB reaction functions. The paper concludes that the correct identification of a possible impact of regional divergence is important for the transparency issue.
Divergence (linguistics)
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PrimĂĄrnĂm cĂlem ECB, definovanĂ˝m v MaastrichtskĂ˝ch kritĂŠriĂch, je udrĹženĂ stabilnĂ cenovĂŠ hladiny. V pĹĂpadÄ, Ĺže je tento cĂl splnÄn, mĹŻĹže tato centrĂĄlnĂ banka svou monetĂĄrnĂ politiku zamÄĹit na stimulaci rĹŻstu a zamÄstnanosti v HMU. Obavy z nesplnÄnĂ primĂĄrnĂho cĂle s dĹŻsledkem ztrĂĄty kredibility stavĂ ECB do role velmi konzervativnĂ banky. JejĂ konzervativnĂ pĹĂstup je kritizovĂĄn nejen ze stran kandidĂĄtskĂ˝ch zemĂ na vstup do HMU, kterĂŠ majĂ v porovnĂĄnĂ s HMU tendence dosahovat vyĹĄĹĄĂho rĹŻstu za cenu vyĹĄĹĄĂho rĹŻstu cenovĂŠ hladiny, ale takĂŠ ze stran stĂĄvajĂcĂch ÄlenskĂ˝ch stĂĄtĹŻ HMU. OdliĹĄnĂŠ poĹžadavky na expanzivnost Äi restriktivnost monetĂĄrnĂ politiky ECB se vyskytujĂ z dĹŻvodu rozdĂlnĂ˝ch temp rĹŻstu a inflace v jednotlivĂ˝ch stĂĄtech EurozĂłny. ElegantnĂm nĂĄstrojem pro vĂ˝poÄet poĹžadovanĂŠ výťe ĂşrokovĂŠ sazby na zĂĄkladÄ mezery rĹŻstu a inflaÄnĂ mezery, tedy odchylky inflace od cĂlovĂŠ hodnoty, je Taylorovo pravidlo.HlavnĂm pĹĂnosem ÄlĂĄnku je diskuse na tĂŠma konzistentnosti preferencĂ ECB a nĂĄrodnĂch centrĂĄlnĂch bank kandidĂĄtskĂ˝ch zemĂ na vstup do EMU, zaloĹženĂĄ na netradiÄnĂm empirickĂŠm odhadu parametrĹŻ Taylorova pravidla. Do empirickĂŠ analĂ˝zy vstupujĂ jako exogennĂ promÄnnĂŠ krĂĄtkodobĂŠ ĂşrokovĂŠ sazby na mezibankovnĂm trhu. SoudobĂŠ empirickĂŠ studie povaĹžujĂ krĂĄtkodobĂŠ ĂşrokovĂŠ sazby na mezibankovnĂm trhu za endogennĂ promÄnnĂŠ, reprezentujĂcĂ poĹžadovanou výťi ĂşrokovĂ˝ch sazeb v podmĂnkĂĄch jednotlivĂ˝ch stĂĄtĹŻ. CĂlem autorĹŻ tohoto ÄlĂĄnku nenĂ porovnat poĹžadovanou výťi krĂĄtkodobĂ˝ch ĂşrokovĂ˝ch sazeb, ale analyzovat vlastnĂ preference centrĂĄlnĂch bank. Tyto jsou v modelu vyjĂĄdĹeny parametry a a b. RozdĂly mezi jednotlivĂ˝mi stĂĄty v podobÄ rozdĂlnĂ˝ch temp rĹŻstu a inflace se sice odrĂĄĹžejĂ v rĹŻznĂ˝ch ĂşrovnĂch poĹžadovanĂ˝ch ĂşrokovĂ˝ch sazeb, ale za mnohem vhodnÄjĹĄĂ autoĹi povaĹžujĂ rozdĂly v preferencĂch centrĂĄlnĂch bank tÄchto zemĂ. Po zaÄlenÄnĂ kandidĂĄtskĂ˝ch zemĂ do EMU lze dĂky procesu reĂĄlnĂŠ konvergence oÄekĂĄvat zmÄnu inflaÄnĂch tlakĹŻ i podmĂnek rĹŻstu. ZmÄnu v preferencĂch monetĂĄrnĂch autorit danĂ˝ch zemĂ ale oÄekĂĄvat nelze.EmpirickĂĄ analĂ˝za prokĂĄzala, Ĺže CentrĂĄlnĂ banka MaÄarska viditelnÄ preferuje stimulaci rĹŻstu pĹed stabilitou cenovĂŠ hladiny. V analyzovanĂŠm obdobĂ ECB, ÄeskĂĄ nĂĄrodnĂ banka a NĂĄrodnĂ banka Polska shodnÄ preferujĂ stabilitu cenovĂŠ hladiny pĹed stimulacĂ ekonomickĂŠho rĹŻstu (tab. I-VI).
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We show that comments by euro area central bankers contain information on future ECB interest rate decisions, but that the comments mainly reflect recent developments in macroeconomic variables. Furthermore, models using only communication variables are outperformed by straightforward Taylor rule models. During the first years of the European Economic and Monetary Union, comments by ECB Executive Board members and high-level Bundesbank policy-makers were more informative than comments by national central bank presidents. We also find that differences of opinion were informative when they concerned the outlook for economic growth. Finally, our results suggest that the ECB used communication especially to signal interest rate increases.
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Abstract. In this paper, using the Taylor rule (Taylor, 1993), the European Central Bank (ECB) monetary policy in 2000–2012, as well as individual interest rate needs of the euro area (EA) countries are analysed. It is assumed that the estimated Taylor rule interest rates are optimal for individual members. We have analysed whether the actual ECB interest rates and the calculated rates are different and have become more balanced towards individual countries’ needs. The work focuses attention on the last period (2008–2012) when the EA faced economic problems and an asymmetric shock. The analysis shows controversial results: on the one hand, the interest deviation mean decreases (just a little), but an increasing gap between individual needs can be seen: some countries are becoming increasingly divorced from the general EA needs. It makes them very vulnerable, and there is a risk that these countries in the face of asymmetric challenges can be “left behind” by the ECB focusing on the EA as a whole. Also, in this paper, the stationarity of the calculated deviations is analysed to help understand their nature. This approach is new, and the author is unaware of similar works. Analysis of the optimal interest rate dynamics has revealed that Germany needed the interest rates that were opposite to the needs of Spain and Greece and susceptible to divergence, so this led to the ECB difficulties in determining the proper interest for all countries’ needs. The EA as a currency area is most optimal for Belgium, Cyprus, Finland, France, Italy, and the Netherlands from the interest rate setting perspective.Key words: the Taylor rule, optimal monetary policy, asymmetric shocks, optimal currency area
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We analyze the ECB Governing Council’s voting procedures. The literature has by now discussed numerous aspects of the rotation model but does not account for many institutional aspects of the voting procedure of the GC. Using the randomization scheme based on the multilinear extension (MLE) of games, we try to close three of these gaps. First, we integrate specific preferences of national central bank presidents, i.e. their desired interest rates. Second, we address the agenda-setting power of the ECB president. Third, we do not simulate an average of the decisions but look at every relevant point in time separately.
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The ECB’s price stability mandate has been defined by the Treaty. But the Treaty has not spelled out what price stability precisely means. To make the mandate operational, the Governing Council has provided a quantitative definition in 1998 and a clarification in 2003. The landscape has changed notably compared to the time the strategy review was originally designed. At the time, the main concern of the Governing Council was to anchor inflation at low levels in face of the inflationary history of the previous decades. Over the last decade economic conditions have changed dramatically: the persistent low-inflation environment has created the concrete risk of de-anchoring of longer-term inflation expectations. Addressing low inflation is different from addressing high inflation. The ability of the ECB (and central banks globally) to provide the necessary accommodation to maintain price stability has been tested by the lower bound on nominal interest rates in the context of the secular decline in the equilibrium real interest rate. Against this backdrop, this report analyses: the ECB’s performance as measured against its formulation of price stability; whether it is possible to identify a preferred level of steady-state inflation on the basis of optimality considerations; advantages and disadvantages of formulating the objective in terms of a focal point or a range, or having both; whether the medium-term orientation of the ECB’s policy can serve as a mechanism to cater for other considerations; how to strengthen, in the presence of the lower bound, the ECB’s leverage on private-sector expectations for inflation and the ECB’s future policy actions so that expectations can act as ‘automatic stabilisers’ and work alongside the central bank.
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The discussion about country-specific influence on the interest rate decisions of the European Central Bank does not cease. To investigate the possibility of regional influence on the determination of the policy rate, we estimate Taylor-type reaction functions for the period from 1999 to 2005 and include country-specific variables of the euro zone member states. We do not find convincing evidence that country-specific economic developments influence the decisions of the ECB Governing Council. However, the maximum inflation rate and the minimum economic sentiment of the euro area seem to have an effect on the decisions.
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Abstract Over the last decade, the simple instrument policy rule developed by Taylor has become a popular tool for evaluating the monetary policy of central banks. As an extensive empirical analysis of the European Central Bank’s (ECB) past behaviour still seems to be in its infancy, we estimate several instrument policy reaction functions for the ECB to shed some light on actual monetary policy in the euro area under the presidency of Wim Duisenberg and answer questions like whether the ECB has actually followed a stabilizing or a destabilizing rule so far. Looking at contemporaneous Taylor rules, the evidence presented suggests that the ECB is accommodating changes in inflation and hence follows a destabilizing 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 that do imply a stabilizing 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 United States.
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