Threshold effects in the monetary policy reaction function of the Deutsche Bundesbank

Martin Mandler

No 201129, MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung)

Abstract: We estimate monetary policy reaction functions with threshold effects for the Deutsche Bundesbank using a real-time data set. Estimates based on the deviation of inflation from the Bundesbank’s inflation target as threshold variable suggest a switch to a stronger output gap response in the reaction function if past inflation was high. The reaction function in the regime with higher inflation implies an overall less contractionary monetary policy than that for the low inflation regime. A modified model with three regimes shows this result to be related to periods of substantial excess inflation. We explore a threshold reaction function with a moving inflation target that captures a gradual adjustment of an intermediate to a long-term inflation target and find the Bundesbank to follow a more restrictive monetary policy stance if inflation is above the intermediate-term inflation target.

Keywords: monetary policy reaction function; threshold regression; instrumental variables; real-time data (search for similar items in EconPapers)
JEL-codes: C24 C26 E52 E58 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2011
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Citations: View citations in EconPapers (1)

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Working Paper: Threshold effects in the monetary policy reaction function of the Deutsche Bundesbank (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:mar:magkse:201129

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