Money-Based Interest Rate Rules: Lessons from German Data

48 Pages Posted: 8 Jun 2016

See all articles by Christina Gerberding

Christina Gerberding

Deutsche Bundesbank

Franz Seitz

Technical University of Applied Sciences Weiden

Andreas Worms

Deutsche Bundesbank, Economics Department

Date Written: 2007

Abstract

The paper derives the monetary policy reaction function implied by money growth targeting. It consists of an interest rate response to deviations of the inflation rate from target, to the change in the output gap, to money demand shocks and to the lagged interest rate. In the second part, it is shown that this type of inertial interest rate rule characterises the Bundesbank's monetary policy from 1979 to 1998 quite well. This result is robust to the use of real-time or ex post data and to the consideration of serially correlated errors. The main lesson is that, in addition to anchoring long-term inflation expectations, monetary targeting introduces inertia and history-dependence into the

Keywords: Monetary policy, Taylor rule, money growth targets, history dependence

JEL Classification: E58, E52, E43

Suggested Citation

Gerberding, Christina and Seitz, Franz and Worms, Andreas, Money-Based Interest Rate Rules: Lessons from German Data (2007). Bundesbank Series 1 Discussion Paper No. 2007,06, Available at SSRN: https://ssrn.com/abstract=2785281

Christina Gerberding (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Franz Seitz

Technical University of Applied Sciences Weiden ( email )

Hetzenrichter Weg 15
D-92637 Weiden i.d. Opf
Germany
(49) 961-382-1318 (Fax)

Andreas Worms

Deutsche Bundesbank, Economics Department ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

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