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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 4 Monetary policy and oil price expectations

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4.1 Introduction Since the beginning of the first oil crisis in October 1973, the macroeconomic effects of oil price shocks have been analyzed in detail (Carlstrom and Fuerst 2005, Natal 2009, Montoro 2010). In this regard, a large number of studies report a correlation between increases in oil prices and subsequent economic downturns (Hamilton 1983, Hamilton and Herrera 2004). However, it is not clear whether such an economic downturn is directly triggered by an oil price shock or whether the monetary policy tightening due to the inflationary pressure causes a downward movement in real economic activity. The debate on whether central banks should respond to the oil price is remarkable but contentious (Bernanke et al., 1997, Hamilton and Herrera 2004, Blanchard and Gali 2007, Svensson 2006) and there is no study examining whether central banks actually respond to the oil price. This letter tries to close this research gap and addresses the question whether central banks respond to the oil price or oil price expectations. To this end, we estimate monetary policy rules in the spirit of Taylor (1993) assuming that the short-term interest rate reacts to inflation and output. We account for the forward-looking behavior of central banks (Clarida et al., 1998, 2000) by using a unique data set of expectational data which also prevents the real-time data problem. 70 Chapter 4. Oil price expectations 4.2 The data set To estimate the central bank’s reaction function, we use the relevant short- term interest rate for conducting...

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