The European Central Bank Monetary Policy and the Taylor Rule, 1999-2009

Abstract

In this paper, we try to see whether there is a model that can describe ECB monetary policy in simple, intuitive terms, and whether the model is consistent over time . We nd such a model, which has the form of the Taylor rule. In fact, the main result of the paper points that ECB monetary policy in the last decade can indeed be described by a Taylor rule, with a caveat: the model ts the data soundly for two subperiods, 1999-2002 and 2007-2009, but does not work well for 2003-2006 . Furthermore, the parameters that describe the Taylor rule are fairly stable over time, although the weight placed in output is slightly larger in 2007-2009 than in 1999-2002 . Next, we compute optimal interest rates for some individual representative countries and, especially in the rst of the subperiods for a set of countries that do not belong to the core of the Eurozone, nd some signicant divergences among their optimal interest rates and the rate set by the ECB. [PUBLICATION ABSTRACT]