Asymmetric Interest Rate Policy in Europe: Causes and Consequences

Axel A. Weber

Chapter 4 in The Monetary Transmission Process, 2001, pp 131-169 from Palgrave Macmillan

Abstract: Abstract The recent theoretical and empirical literature on monetary policy rules has increasingly focused on short-term interest rates rather than monetary aggregates for studying European monetary policy issues. There are several reasons for this: first, as in the United States, monetary aggregates in Europe have displayed a less obvious link to real economic activity and inflation during the 1980s and 1990s as opposed to the 1960s and 1970s. Second, many central banks have de-emphasised the role of monetary aggregates and have moved to operating procedures that focus more on interest rates (i.e. the Fed funds target rate in the United States) or inflation rates (i.e. the inflation targets in the United Kingdom, Canada, or New Zealand). Following the paper by Taylor (1993) and more recent applications by Clarida and Gertler (1997), Clarida, Gali and Gertler (1997, 1998), Gerlach and Smets (1998), Kuttner and Posen (1998) and Rudebusch and Svensson (1998) there is now a growing literature on so-called ‘interest rate smoothing’ rules for Europe.1 These papers use a simple policy reaction function in which interest rate adjustment towards equilibrium depends on the deviations of inflation and output from their respective target values. It is shown that such policy reaction functions fit the data quite well.

Keywords: Interest Rate; Monetary Policy; Central Bank; Real Interest Rate; European Central Bank (search for similar items in EconPapers)
Date: 2001
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-59599-6_5

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DOI: 10.1057/9780230595996_5

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