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Monetary Policy Rules

Empirical Applications Based on Survey Data

Series:

Dirk Bleich

This work provides different studies of how econometric evaluation of monetary policy based on forward-looking Taylor rules is conducted. The first part discusses theoretical results regarding the Taylor principle and can be used as a guideline for the evaluation of the following three empirical applications based on survey data of Consensus Economics. The first application deals with the question whether the introduction of inflation targeting affects monetary policy. The second application investigates the consequences of oil price movements for monetary policy. The third application analyzes monetary policy conditions in Spain before and after the changeover to the Euro by estimating forward-looking Taylor rules.

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Contents

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1 Introduction 15 2 Stability conditions for forward-looking monetary policy rules in the basic New Keynesian model 19 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.2 The basic New Keynesian model . . . . . . . . . . . . . . . . . 22 2.3 Stability of equilibrium under rational expectations . . . . . . 24 2.3.1 The idea of equilibrium . . . . . . . . . . . . . . . . . . 24 2.3.2 How economics differ from natural science: The role of expectations . . . . . . . . . . . . . . . . . . . . . . . . 25 2.3.3 Determinacy as an important property of equilibrium . 26 2.3.4 Deriving the Taylor principle for a forward-looking Tay- lor rule under rational expectations . . . . . . . . . . . 30 2.4 Adaptive Learning . . . . . . . . . . . . . . . . . . . . . . . . 32 2.4.1 The E-stability condition . . . . . . . . . . . . . . . . . 33 2.4.2 Deriving the Taylor principle for a forward-looking Tay- lor rule under adaptive learning . . . . . . . . . . . . . 38 2.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 3 Inflation targeting makes the difference: Novel evidence on inflation stabilization 41 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 3.2 The empirical morphology of Taylor-type rules . . . . . . . . . 43 3.3 The data set . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 3.4 Estimation results . . . . . . . . . . . . . . . . . . . . . . . . . 51 3.5 Expectations on the long-term inflation rate . . . . . . . . . . 57 3.6 A Time-varying perspective . . . . . . . . . . . . . . . . . . . 62 3.6.1 The role of time-varying inflation targets . . . . . . . . 62 3.6.2 The time-variance of the inflation coefficient . . . . . . 63 3.7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 10 Contents 4 Monetary policy and oil price expectations 69 4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 4.2 The data set . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 4.3 Estimation results . . . . . . . . . . . . . . . . . . . . . . . . . 71 4.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 5 The Euro and the Spanish housing bubble 77 5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 5.2 The empirical morphology of Taylor-type rules . . . . . . . . . 80 5.3 The data set . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 5.4 Spain’s pre-Euro monetary policy . . . . . . . . . . . . . . . . 85 5.5 Monetary policy after the Euro . . . . . . . . . . . . . . . . . 88 5.6 Consequences for the housing sector . . . . . . . . . . . . . . . 93 5.7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97...

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