Empirical Estimates of Reaction Functions for the Euro Area
60 Pages Posted: 4 Feb 2003
Date Written: January 2003
This paper contains a set of estimates of reaction functions for the euro area based on a monthly data set starting in 1985. The main aim is to assess the performance of Taylor rules and to evaluate whether alternative specifications based, inter alia, on the inclusion of additional variables not contained in the original specification proposed by Taylor or the use of different measures of the output gap and the inflation term, can better track the interest rate setting in the euro area. An interesting result is that monetary developments (in the form of a money growth gap indicator derived as the deviation of M3 growth from its estimated reference value) enter significantly as an additional variable in a Taylor-like policy rule specification for the euro area.
Keywords: Taylor rules, reaction functions, monetary policy, euro area
JEL Classification: E58, F41
Suggested Citation: Suggested Citation