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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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Chapter 6 Conclusion and policy implications

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This thesis deals with the empirical application of monetary policy rules based on survey data. It focused on a specific class of empirical reaction functions - often referred to as Taylor-type rules - where the interest rate is related to deviations of inflation and output from their respective target levels. Since a forward-looking variant of this policy rule with interest rate smoothing according to Clarida et. al (1998, 2000) is the the most popular one, this thesis also follows this direction. The utilized survey data set about expectational data provided by Consensus Economics turns out to be in particular suitable for the purpose of estimating forward-looking reaction functions, since the forecasts of this data set are currently observed data which are not revised and, hence are not subject to the real-time data critique by Orpahanides (2001). Chapter 2 provides a theoretical foundation of the Taylor principle – the nominal interest rate should be adjusted by more than one-for-one with changes in the inflation rate (Bullard and Mitra (2002))– which is often used as a guideline for sound monetary policy. However, the Taylor princi- ple gives only a rough guide of how to adjust the interest rate. As has been demonstrated, the response to changes in the output gap is also of impor- tance. Moreover, this chapter demonstrated that the critical values of how the nominal interest rate has to be adjusted to changes in the inflation rate and the output gap for a stable equilibrium heavily depend...

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