Open Economies Review

, Volume 20, Issue 1, pp 39–59 | Cite as

Asset Prices as Indicators of Euro Area Monetary Policy: An Empirical Assessment of Their Role in a Taylor Rule

  • Pierre L. SiklosEmail author
  • Martin T. Bohl
Research Article


This paper estimates forward-looking and forecast-based Taylor rules for France, Germany, Italy, and the euro area. Performing extensive tests for over-identifying restrictions and instrument relevance, we find that asset prices can be highly relevant as instruments in policy rules. While asset prices improve Taylor rule estimates, different assets prove most relevant across countries and this result could be seen as complicating the tasks of the European Central Bank. Encompassing tests show that forecast-based outperform forward-looking Taylor rules. A policy implication is that central banks ought to release their own forecasts and the basis upon which they are generated.


Monetary policy reaction functions Asset prices Instruments European Central Bank 

JEL Classification

E52 E58 C52 



Both authors like to thank seminar participants at the Bundesbank, the Universidade Católica de Brasilia, Queensland University of Technology, the Oesterreichische Nationalbank, the Norges Bank, the European Central Bank, and the CIRANO Workshop on Macroeconomic Forecasting, Analysis and Policy with Data Revisions, and the 2007 Money, Macro and Finance Research Group Conference where earlier versions of this paper were presented. Both authors are grateful for financial support from the Alexander von Humboldt Foundation, to Claudio Borio of the Bank for International Settlements, and the Bank of Finland for some of the data used in the paper. Helpful comments by Andy Filardo, Frank Smets, and an anonymous referee, also helped improve the paper. Results not shown in the paper are relegated to an appendix available from the first author on request.


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Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Department of EconomicsWilfrid Laurier UniversityWaterlooCanada
  2. 2.Viessmann European Research CentreWaterlooCanada
  3. 3.Westfälische Wilhelms-University MünsterMünsterGermany

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