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

Pierre Siklos () and Martin T. Bohl ()
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Martin T. Bohl: WestfŠlische Wilhelms-University MŸnster, Germany

Working Paper Series from Rimini Centre for Economic Analysis

Abstract: 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.

Keywords: Monetary policy reaction functions; Asset prices; Instruments; European Central Bank (search for similar items in EconPapers)
JEL-codes: E52 E58 C52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
Date: 2007-07, Revised 2007-07

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Related works:
Working Paper: Asset Prices as Indicators of Euro Area Monetary Policy: An Empirical Assessment of Their Role in a Taylor Rule (2006)
Journal Article: Asset Prices as Indicators of Euro Area Monetary Policy: An Empirical Assessment of Their Role in a Taylor Rule (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:rim:rimwps:32-07

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