The Taylor Rule and Monetary Policy in the Euro Area

39 Pages Posted: 11 Nov 2010

See all articles by Jean-Stéphane Mésonnier

Jean-Stéphane Mésonnier

Banque de France

Jean-Paul Renne

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)

Date Written: October 1, 2004

Abstract

We estimate the reaction function of monetary policy in the Euro area and derive the Taylor-type policy rule that a would-be ECB would have followed since the beginning of the European Monetary System (1979-2003). We first follow the standard GMM methodology developed by Clarida, Galí and Gertler (1998) under the statistically valid assumption of a stationary data set. A detailed robustness analysis is conducted, in order to assess how the estimation results are affected by changes in the period under review, the set of instruments and the way the output gap is computed. Using the Kalman filter, we estimate in particular a measure of the output gap that is consistent with a small macroeconomic model, which constitutes a novelty of our approach. Secondly, we re-estimate the historical interest rate rule under the assumption of non-stationary data over the 1985-2003 period, following a methodology recently proposed by Gerlach-Kristen (2003). These empirical investigations lead to a reasonably robust descriptive tool of the systematic element in the monetary policy that prevailed on average in the "Euro area" over the last two decades.

Note: Downloadable document is in French.

Keywords: Kalman filter, Monetary policy, Taylor rule, Euro area

JEL Classification: C15, C32, E43, E52

Suggested Citation

Mésonnier, Jean-Stéphane and Renne, Jean-Paul, The Taylor Rule and Monetary Policy in the Euro Area (October 1, 2004). Banque de France Working Paper No. 117, Available at SSRN: https://ssrn.com/abstract=1706127 or http://dx.doi.org/10.2139/ssrn.1706127

Jean-Stéphane Mésonnier (Contact Author)

Banque de France ( email )

Paris
France

Jean-Paul Renne

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

UNIL, Batiment Internef
Lausanne, 1015
Switzerland

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