An Empirical Comparison of Bundesbank and ECB Monetary Policy Rules

25 Pages Posted: 22 Aug 2001

See all articles by Jon Faust

Jon Faust

Board of Governors of the Federal Reserve - Division of International Finance; Johns Hopkins University

John H. Rogers

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section

Jonathan H. Wright

Johns Hopkins University - Department of Economics

Date Written: August 2001

Abstract

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.

Keywords: Taylor Rule, monetary policy, European Central Bank, Bundesbank, inflation

JEL Classification: C32, E43

Suggested Citation

Faust, Jon and Rogers, John H. and Wright, Jonathan H., An Empirical Comparison of Bundesbank and ECB Monetary Policy Rules (August 2001). FRB International Finance Discussion Paper No. 705. Available at SSRN: https://ssrn.com/abstract=280811 or http://dx.doi.org/10.2139/ssrn.280811

Jon Faust

Board of Governors of the Federal Reserve - Division of International Finance ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2328 (Phone)
202-736-5638 (Fax)

Johns Hopkins University

Baltimore, MD 20036-1984
United States

John H. Rogers (Contact Author)

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2873 (Phone)
202-736-5638 (Fax)

Jonathan H. Wright

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
631
Abstract Views
3,016
rank
41,445
PlumX Metrics