Comparing Monetary Policy Reaction Functions: ECB Versus Bundesbank

Marburg Economics Working Paper No. 02-2005

23 Pages Posted: 28 Apr 2005

See all articles by Bernd Hayo

Bernd Hayo

University of Marburg - School of Business & Economics

Boris Hofmann

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: April 2005

Abstract

This paper compares the ECB's conduct of monetary policy with that of the Bundesbank. Estimated monetary policy reaction functions for the Bundesbank (1979:4-1998:12) and the European Central Bank (1999:1-2004:5) show that, while the ECB and the Bundesbank react similarly to expected inflation, the ECB reacts significantly stronger to the output gap. Theoretical considerations suggest that this stronger response to the output gap may rather be due to a higher interest rate sensitivity of the German output gap than to a higher weight given to output stabilisation by the ECB. Counterfactual simulations based on the estimated interest rate reaction functions suggest that German interest rates would not have been lower under a hypothetical Bundesbank regime after 1999. However, this conclusion crucially depends on the assumption of an unchanged long-run real interest rate for the EMU period. Adjusting the Bundesbank reaction function for the lower long-run real interest rate estimated for the ECB regime reverses this conclusion.

Keywords: Taylor rule, monetary policy, ECB, Bundesbank

JEL Classification: E5

Suggested Citation

Hayo, Bernd and Hofmann, Boris, Comparing Monetary Policy Reaction Functions: ECB Versus Bundesbank (April 2005). Marburg Economics Working Paper No. 02-2005. Available at SSRN: https://ssrn.com/abstract=710241 or http://dx.doi.org/10.2139/ssrn.710241

Bernd Hayo (Contact Author)

University of Marburg - School of Business & Economics ( email )

Universitaetsstr. 24
Marburg, D-35032
Germany
++49(0)6421-28-23091 (Phone)
++49(0)6421-28-23193 (Fax)

Boris Hofmann

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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