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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page An Empirical Comparison of Bundesbank and ECB Monetary Policy Rules
Jon Faust; John Rogers; Jonathan H. Wright
2001-705  (August 2001)

Abstract:  We estimate a monetary policy reaction function for the Bundesbank and use it as a benchmark to assess the monetary policy of the ECB since the launch of the euro in January 1999. We find that euro interest rates are low relative to this benchmark. We consider several possible reasons for this, including the divergence between core and headline inflation, inflation having turned out to be higher than could have been foreseen by the ECB and the possibility that the ECB is focussing only on macroeconomic conditions in a subset of member countries. We argue that these potential explanations cannot account for the difference between recent interest rates and our estimated Bundesbank benchmark. Our results suggest that the reaction function of the ECB features a high weight on the output gap relative to the weight on inflation, compared to the Bundesbank.

Full paper (565 KB PDF)

Keywords
Taylor Rule, Monetary Policy, European Central Bank, Bundesbank, Inflation

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Last update: August 9, 2001