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Monetary Policy Rules

Empirical Applications Based on Survey Data

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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 3 Inflation targeting makes the difference: Novel evidence o ninflation stabilization

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Chapter 3 Inflation targeting makes the difference: Novel evidence on inflation stabilization 3.1 Introduction In the past decades inflation rates across the globe have been reduced sig- nificantly. In the 1980s Latin-American countries experienced the highest inflation rates of all countries averaging more than 200 percent per year. In contrast, in 2007 they had an average inflation rate of about 6 percent. A similar process of declining inflation rates took place in many central and eastern European countries during the 1990s. As a group, these countries reduced their inflation rates substantially from, on average, 45 percent per year in the 1990s down to, on average, 5 percent per year in 2007. This process of stabilizing inflation was achieved under fairly different monetary and exchange rate regimes, ranging from the adoption of inflation targeting combined with floating exchange rates to the abandonment of independent monetary policy by introducing currency boards or even by dollarization of the economy. While all stabilization strategies aim to increase central bank credibility in order to stabilize inflation expectations and, thus, inflation itself, inflation targeting is the most prominent strategy and, hence, has gained substantial support among the economics profession. So has the use of Taylor rules for characterizing central banks’ behavior. Even though theoretically inflation 42 Chapter 3. Inflation targeting targeting is proven to be consistent with monetary policy rules (Svensson, 1997, 2003), empirical evidence in favor of the...

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