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Interest rate reaction functions for the euro area

Evidence from panel data analysis

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Abstract

Estimating interest rate reaction functions for the euro area is still hampered by the short time span since the conduct of a single monetary policy. This is why estimates of union-wide reaction functions are usually based on historical pre-EMU data. In this paper we circumvent the common use of aggregated data before 1999 by estimating interest rate reaction functions based on a panel including actual EMU Member States. We find that exploiting the cross-section dimension of a multi-country panel and accounting for cross-country heterogeneity in advance of the single monetary policy improves the ability of historical reaction functions to describe actual interest rate dynamics. We retrieve a panel reaction function which is employed for evaluating interest rate setting since 1999.

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  1. Deutsche Bundesbank, Economics Department, Wilhelm-Epstein-Str. 14, 60431, Frankfurt, Germany

    Karsten Ruth

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  1. Karsten Ruth
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Correspondence to Karsten Ruth.

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Ruth, K. Interest rate reaction functions for the euro area. Empirical Economics 33, 541–569 (2007). https://doi.org/10.1007/s00181-006-0117-y

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