Skip to main content

Taylor rules revisited: ECB and Bundesbank in comparison

Abstract

This paper analyses the interest rate-setting behaviour of the ECB and the former leading monetary authority in the Eurozone, the German Bundesbank, using Taylor rules in different GMM-estimation setups. The main findings are as follows: the Bundesbank was clearly stability oriented with regard to inflation and included output stabilization, interest rate smoothing and inflation forecasts in its decision-making process during the period under investigation, that is 1979M01-1998M12. Furthermore, evidence of the inclusion of the quantity of money in the decisions has been found at least for the 1980s. The estimation results for the ECB from 1999M01 onwards reveal a monetary policy that is less stability oriented than that of the Bundesbank in that it clearly violates the Taylor principle. According to this, the ECB cannot be seen as the successor of the Bundesbank as regards the way it has conducted monetary policy.

This is a preview of subscription content, access via your institution.

Fig. 1
Fig. 2

Notes

  1. 1.

    While there is broad consensus concerning the smoothing parameter for quarterly data (1600), there is an ongoing discussion about the appropriate parameter for monthly data (Ravn and Uhlig 2002). Because of this, the alternative measure was used in the ECB estimations, since there is a high degree of uncertainty about the output gap, especially around the starting time of the financial crisis.

  2. 2.

    See Andrews (1999) and Andrews and Lu (2001) for similar model and moment selection criteria. For reasons of robustness, the GMM-BIC and the GMM-HQIC moment selection criteria proposed by Andrews (1999) were also checked, leading to similar results.

  3. 3.

    The ex-post data series were drawn using Thomson Reuters Datastream. The real-time series were drawn directly from the ECB homepage.

  4. 4.

    Monetary policy measures work not instantaneously but with a lag, so a forecast horizon of six or more months is plausible. See, for instance, Orphanides (2001) or Greenspan (1997).

  5. 5.

    Empirical evidence of the Taylor principle can be found in Taylor (1999), where the Fed’s monetary policy from 1879 to 1997 is examined. The finding here is that periods in which the central bank fulfilled the Taylor principle were characterized by lower production and inflation volatilities.

  6. 6.

    The target interest rate follows the EURIBOR series closely, so for reasons of clarity it is not shown here.

  7. 7.

    In a recently published study by Hayo and Méon (2013) the authors report evidence of national influences on ECB monetary policy decisions through voting behaviour.

  8. 8.

    See, for example, Hayo (2007) for a similar approach.

  9. 9.

    Here, the forecast horizon of seven months is used, since this specification gave the best RMSC in the setup for Eq. (3) in this subsample.

  10. 10.

    The average money growth over the whole subsample was used as the target money growth rate.

  11. 11.

    I owe this point to an anonymous referee.

References

  1. Andrews DWK (1999) Consistent moment selection procedures for generalized method of moments estimation. Econometrica 67(3):543–564

    Article  Google Scholar 

  2. Andrews DWK, Lu B (2001) Consistent model and moment selection procedures for GMM estimation with application to dynamic panel data models. J Econom 101(1):123–164

    Article  Google Scholar 

  3. Belke A, Polleit T (2007) How the ECB and the US fed set interest rates. Appl Econ 39(17):2197–2209

    Article  Google Scholar 

  4. Belke A, Klose J (2010) (How) Do the ECB and the fed react to financial market uncertainty?. The Taylor Rule in Times of Crisis, Ruhr Economic Papers No. 166

  5. Belke A, Orth W, Setzer R (2010) Liquidity and the dynamic pattern of asset price adjustment: a global view. J Bank Financ 34(8):1933–1945

    Article  Google Scholar 

  6. Bernanke BS, Mihov I (1997) What does the Bundesbank target? Eur Econ Rev 41(6):1025–1053

    Article  Google Scholar 

  7. Clausen JR, Meier CP (2005) Did the Bundesbank follow a Taylor rule? An analysis based on real-time data. Swiss J Econ Stat 141(2):213–246

    Google Scholar 

  8. Clausen V, Hayo B (2005) Monetary policy in the Euro area—lessons from the first years. Int Econ Econ Policy 1(4):349–364

    Article  Google Scholar 

  9. Clarida RH, Gali J, Gertler M (1998) Monetary policy rules in practice. Some international evidence. Eur Econ Rev 42(6):1033–1067

    Article  Google Scholar 

  10. Faust J, Rogers JH, Wright JH (2001) An empirical comparison of Bundesbank and ECB monetary policy rules. International Finance Discussion Papers No. 705, Board of Governors of the Federal Reserve System

  11. Gerberding C, Seitz F, Worms A (2005) How the Bundesbank really conducted monetary policy. N Am J Econ Financ 16(3):277–292

    Article  Google Scholar 

  12. Gerdesmeier D, Roffia B (2003) Empirical estimates of reaction funktions for the Euro Area. ECB Working Paper Series No. 206, European Central Bank, Frankfurt am Main

  13. Gerdesmeier D, Roffia B (2004) Taylor rules for the euro area: the issue of real-time data. Discussion Paper Series 1: Studies of the Economic Research Centre No. 37, Deutsche Bundesbank, Frankfurt am Main

  14. Gerlach S, Schnabel G (2000) The Taylor rule and interest rates in the EMU area. Econ Lett 67(2):165–171

    Article  Google Scholar 

  15. German Bundesbank (1995) Die Geldpolitik der Bundesbank. Selbstverlag der Deutschen Bundesbank, Frankfurt am Main

  16. Greenspan A (1997) Testimony before the Committee on the Budget, January 21, United States Senate

  17. Hall AR, Inoue A, Jana K, Shin C (2007) Information in generalized method of moments estimation and entropy-based moment selection. J Econom 138(2):488–512

    Article  Google Scholar 

  18. Hayashi F (2000) Econometrics. Princeton University Press, Princeton

    Google Scholar 

  19. Hayo B, Hofmann B (2006) Comparing monetary policy reaction functions: ECB versus Bundesbank. Empir Econ 31(3):645–662

    Article  Google Scholar 

  20. Hayo B (2007) Is European monetary policy appropriate for the EMU member countries? A counterfactual analysis. In: Cobham D (ed) The travails of the Eurozone. Palgrave MacMillan, Houndmills

    Google Scholar 

  21. Hayo B, Méon PG (2013) Behind closed doors: revealing the ECB’s decision rule. J Int Money Financ 37:135–160

    Article  Google Scholar 

  22. Hodrick RJ, Prescott EC (1997) Postwar U.S. business cycles: an empirical investigation. J Money Credit Bank 29(1):1–16

    Article  Google Scholar 

  23. Kilian L, Manganelli S (2008) The central banker as a risk manager: estimating the federal reserve’s preferences under Greenspan. J Money Credit Bank 40(6):1103–1129

    Article  Google Scholar 

  24. Mishkin FS (1999) International experiences with different monetary policy regimes. NBER Working Paper Series No. 6965, National Bureau of Economic Research, Cambridge

  25. Molodtsova T, Nikolsko-Rzhevskyy A, Papell DH (2008) Taylor rules with real-time data: a tale of two countries and one exchange rate. J Monetary Econ 55(Supplement):S63–S79

    Article  Google Scholar 

  26. Newey WK, West KD (1987) A simple, positive semi-definite, heteroskedasticity and autocorrelation consistent covariance matrix. Econometrica 55(3):703–708

    Article  Google Scholar 

  27. Orphanides A (2001) Monetary policy rules based on real-time data. Am Econ Rev 91(4):964–985

    Article  Google Scholar 

  28. Ravn MO, Uhlig H (2002) On adjusting the Hodrick–Prescott filter for the frequency of observations. Rev Econ Stat 84(2):371–380

    Article  Google Scholar 

  29. Scheller HK (2006) Die Europäische Zentralbank - Geschichte, Rolle und Aufgaben, zweite edn. EZB, Frankfurt am Main

  30. Taylor JB (1993) Discretion versus policy rules in practice. Carnegie Rochester Conf Ser Public Policy 39:195–214

    Article  Google Scholar 

  31. Taylor JB (1999) A historical analysis of monetary policy rules. Monetary policy rules. National Bureau of Economic Research, Cambridge, 319–348

  32. Taylor JB (2009) The financial crisis and the responses: an empirical analysis of what went wrong. NBER Working Paper Series No. 14631, National Bureau of Economic Research, Cambridge

  33. Ullrich K (2003) A comparison between the Fed and the ECB: Taylor rules. ZEW Discussion Paper No. 03–19, Mannheim

  34. Von Hagen J, Eichengreen B (1996) Federalism, fiscal restraints, and European monetary union. Am Econ Rev 86(2):134–138

    Google Scholar 

  35. Woodford M (2001) The Taylor Rule and Optimal Monetary Policy. Am Econ Rev 91(2):232–237

    Article  Google Scholar 

Download references

Acknowledgments

The author would like to thank Joscha Beckmann, Ansgar Belke, Michael Stein, the editor, Robert M. Kunst, and two anonymous referees for helpful comments and suggestions. The author is responsible for any remaining errors.

Author information

Affiliations

Authors

Corresponding author

Correspondence to Tobias R. Rühl.

Appendix

Appendix

See Tables 4 and 5.

Table 4 Review of Taylor rule estimations for the Bundesbank (Information)
Table 5 Review of Taylor rule estimations for the ECB (Information)

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Rühl, T.R. Taylor rules revisited: ECB and Bundesbank in comparison. Empir Econ 48, 951–967 (2015). https://doi.org/10.1007/s00181-014-0820-z

Download citation

Keywords

  • Taylor rule
  • Monetary policy
  • ECB
  • Bundesbank

JEL Classification

  • E31
  • E43
  • E52
  • E58