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A Speed Limit Monetary Policy Rule for the Euro Area

21 Pages Posted: 11 Dec 2007  

Livio Stracca

European Central Bank (ECB)

Abstract

The main task of central banks is to set the level of short-term nominal interest rates in reaction to economic developments, with the aim of achieving their statutory objectives (typically some combination of inflation and output variability). If agents are forward-looking, central banks can achieve better macroeconomic outcomes by committing to follow a rule-like behaviour. Against this background, the contribution of this paper is twofold. First, it estimates a small-scale model of the euro area economy that can be used as a benchmark for the evaluation of different simple policy rules in the euro area economy. Second, it studies the performance of a relatively new type of rule, labelled 'speed limit' (SL), where the nominal interest rate reacts to the rate of growth in the output gap. The main conclusion of the study is that an SL policy performs remarkably well.

Suggested Citation

Stracca, Livio, A Speed Limit Monetary Policy Rule for the Euro Area. International Finance, Vol. 10, Issue 1, pp. 21-41, Spring 2007. Available at SSRN: https://ssrn.com/abstract=1062006 or http://dx.doi.org/10.1111/j.1468-2362.2007.00196.x

Livio Stracca (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

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