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Monetary Policy Rules

Empirical Applications Based on Survey Data


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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Chapter 1 Introduction


As Taylor and Williams (2010) express, economist have been interested in monetary policy rules since the advent of economics. Adam Smith already suggested in the Wealth of Nations that a "well-regulated paper-money" is superior to a pure commodity standard in terms of fostering economic growth and stability. Other classical economists such as Henry Thornton and David Ricardo specified Smith’s idea by stressing the importance of a rule-based monetary policy to avoid financial crises. Irving Fisher’s quantity theory of money and Knut Wicksel’s interest theory of the early 20th century can be considered as further cornerstones. In the 1960s, Milton Friedman revived the quantity theory of money and suggested his constant growth rate rule. Finally, Taylor (1993) introduced a monetary policy rule, which relates the short-term interest rate to deviations of inflation and output from their respective target levels. This rule became generally known as the Taylor rule. Since the seminal work of Taylor (1993), different variants of Taylor rules – often labeled Taylor type rules – have been developed. In particular, Clarida et al. (1998) proposed a specific forward-looking variant of the Taylor rule which takes into account account the pre-emptive nature of monetary policy as well as interest smoothing behavior of central banks. This type of reaction function has become very popular in applied research and also will be in the center of this thesis. For evaluation of monetary policy the resulting reaction coefficient for the inflation rate is of particular interest. If the central...

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