Paul De Grauwe, Yuemei Ji, 05 May 2020

In times of crisis and extreme uncertainty, forward-looking policymaking becomes difficult. In the midst of the Covid-19 crisis, major central banks appear to be adopting policies based on current conditions, rather than forecasts. This column generalises this observation in a behavioural macroeconomic model which compares forward-looking and current-looking monetary policy. Although both approaches perform similarly in normal times, current-looking monetary policy performs better in crisis periods. When uncertainty is extreme, prudent central banks should be guided by what they observe, and not by unreliable forecasts.

Idris Ademuyiwa, Pierre Siklos, Samantha St. Amand, 08 November 2018

Changes in central banks’ balance sheets are often used as an indicator of monetary policy stance. This column describes the challenges associated with using balance sheet data to analyse policy. Data for 31 advanced and emerging economies reveal a potentially negative, albeit tenuous, relationship between balance sheet policies and monetary policy objectives. The finding calls for more detailed and consistent balance sheet accounting from central banks around the world.

Yasin Mimir, Enes Sunel, 03 April 2018

The Global Crisis originated in developed economies but was also a large shock to emerging market economies. Based on this event, this column argues that emerging market central banks should take into account domestic and external financial variables such as bank credit, asset prices, credit spreads, the US interest rate and the real exchange rate, not just effects on inflation and real economic activity. A stronger anti-inflationary stance is needed when monetary policy aims to maintain financial stability.

Maritta Paloviita, Markus Haavio, Pirkka Jalasjoki, Juha Kilponen, 24 October 2017

Price stability is an explicit target for the ECB, but the definition of the 2% target is less clear in its monetary policy stance over time. This column presents two alternative interpretations of the ECB’s definition of price stability. First, the ECB dislikes inflation rates above 2% more than rates below 2%. Second, the ECB’s policy responses to past inflation gaps are symmetric around a target of 1.6% to 1.7%. Out-of-sample predictions of the reaction function based on the second interpretation track well an estimated shadow interest rate during the zero lower bound period.

Henrike Michaelis, Volker Wieland, 12 May 2017

In recent speeches, Federal Reserve Chair Janet Yellen and ECB President Mario Draghi have attributed the Fed’s and the ECB’s low interest rate environment to low equilibrium rates rather than to Fed or ECB policies. This column argues that estimates of these equilibrium rates are extremely uncertain and sensitive to technical assumptions, and thus should not be used as key determinants of the policy stance. But if used nevertheless, a consistent application together with associated output estimates call for a tightening of the policy stance. 

Henrike Michaelis, Volker Wieland, 03 February 2017

In a recent speech, Janet Yellen, Chair of the Board of Governors of the Federal Reserve System, compared the Fed’s strategy to simple reference rules, including the Taylor rule. This column argues that the comparisons enhance the Fed’s transparency and can help it to stand up to political pressure. However, Chair Yellen also suggests an important role for estimates of medium-run equilibrium real rates. Such estimates are extremely uncertain and sensitive to technical assumptions, and thus should not be used as key determinants of policy stance.

Marcus Miller, Lei Zhang, 10 September 2014

During the Great Moderation, inflation targeting with some form of Taylor rule became the norm at central banks. This column argues that the Global Crisis called for a new approach, and that the divergence in macroeconomic performance since then between the US and the UK on the one hand, and the Eurozone on the other, is partly attributable to monetary policy differences. The ECB’s model of the economy worked well during the Great Moderation, but is ill suited to understanding the Great Recession.

Pelin Ilbas, Øistein Røisland, Tommy Sveen, 13 February 2013

Economists everywhere recognise the Taylor rule’s importance in monetary policymakers’ decisions. But exactly how important is it? This column aims to analyse the Taylor rule’s influence on US monetary policy by estimating the policy preferences of the Fed. There is a high degree of reluctance to let the interest rate deviate from the Taylor rule and, contrary to the literature and current policy debates, it seems large deviations from the Taylor rule between 2001 and 2006 were in fact due to negative demand-side shocks. During this period, there is in fact no evidence to support the notion of a decreased weight on the Taylor rule.

Olivier Coibion, Yuriy Gorodnichenko, 01 March 2010

How long will US interest rates remain so low? This column argues that estimates using the 1993 Taylor rule are concentrating on the output gap, whereas in reality the Fed places much greater emphasis on output growth. Using an updated Taylor rule, this column favours the market view that rates will rise towards the end of 2010.

Carlo Favero, 18 July 2009

Has the Federal Reserve responded too slowly to macroeconomic conditions during the crisis? This column defends the central bank based on new estimates of the policy function, arguing that it has reacted promptly to a gradually evolving macroeconomic situation.

Jakob de Haan, Jan-Egbert Sturm, 27 June 2009

Should informed observers pay attention to the ECB President? This column says it is worthwhile for financial market participants to read the ECB President’s lips, as this adds information about upcoming interest rate decisions that is not provided by expected inflation and expected output growth.


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