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Using Taylor Rules to Assess the Relative Activism of the European Central Bank, the Bank of England and the Federal Reserve Board

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  • David Cobham

Abstract

This paper attempts to assess the relative activism of these three central banks, with reference to the debate on interest rate smoothing. It investigates smoothing in terms of the pattern of interest rate changes, and estimates a series of Taylor-type policy rules for each bank, using quarterly and monthly data, with ‘backward’ and ‘forward’-looking arguments, and with and without lagged dependent variables. It also examines the effect of introducing an auto-correlated error term. There is some (non-robust) evidence that the FRB is more activist, but it also seems to be more smooth; the ECB seems to adjust faster but less strongly in the long run; and the BoE’s behaviour is more difficult to identify. However, these standard policy rules are out of kilter with central banks’ own descriptions of what they do, while the long lags involved raise questions about the relevance of the Taylor principle as conventionally applied. It is therefore suggested that researchers should pay more attention to the institutional context of central banks’ behaviour, in order to produce better estimates of their policy rules which would in turn shed more light on the issues of activism and smoothing.

Suggested Citation

  • David Cobham, 2006. "Using Taylor Rules to Assess the Relative Activism of the European Central Bank, the Bank of England and the Federal Reserve Board," CDMA Conference Paper Series 0602, Centre for Dynamic Macroeconomic Analysis.
    • Handle: RePEc:san:cdmacp:0602
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    File URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0602.pdf
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    References listed on IDEAS

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    Cited by:

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    6. Becchetti, Leonardo & Castriota, Stefano & Giuntella, Giovanni Osea, 2010. "The effects of age and job protection on the welfare costs of inflation and unemployment," European Journal of Political Economy, Elsevier, vol. 26(1), pages 137-146, March.

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    More about this item

    Keywords

    Monetary policy; activism; interest rate smoothing; central banks.;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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