Taylor Rules and Interest Rate Smoothing in the Euro Area

16 Pages Posted: 3 Jan 2007

See all articles by Efrem Castelnuovo

Efrem Castelnuovo

University of Melbourne - Department of Economics

Abstract

Conventional wisdom suggests that central banks implement monetary policy in a gradual fashion. Some researchers claim that this gradualism is due to 'optimal cautiousness'; in contrast, Rudebusch (Journal of Monetary Economics, Vol. 49 (2002), pp. 1161-1187) states that the observed policy rate sluggishness is mainly due to serially correlated exogenous shocks. In this paper we use models in first differences to assess the 'endogenous' versus 'exogenous' gradualism hypothesis for the Euro area. Our results suggest that the joint formalization of the two hypotheses is likely to offer the best simple approximation of the Euro area monetary policy conduct.

Suggested Citation

Castelnuovo, Efrem, Taylor Rules and Interest Rate Smoothing in the Euro Area. Manchester School, Vol. 75, No. 1, pp. 1-16, January 2007. Available at SSRN: https://ssrn.com/abstract=954823 or http://dx.doi.org/10.1111/j.1467-9957.2007.01000.x

Efrem Castelnuovo (Contact Author)

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

HOME PAGE: http://https://sites.google.com/site/efremcastelnuovo/home

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