DISCUSSION PAPER SERIES
No. 2441
ASYMMETRIES IN MONETARY POLICY: EVIDENCE FOR FOUR CENTRAL BANKS
Juan J Dolado, Ramón María-Dolores and Manuel Naveira
INTERNATIONAL MACROECONOMICS
CEPR Discussion Papers are now available online at ZZZFHSURUJ ISSN 0265-8003
ASYMMETRIES IN MONETARY POLICY RULES: EVIDENCE FOR FOUR CENTRAL BANKS
Juan J Dolado, Universidad Carlos III de Madrid and CEPR Ramón María-Dolores, Universidad de Murcia Manuel Naveira, BBVA
Discussion Paper No. 2441 April 2000
Centre for Economic Policy Research 90–98 Goswell Rd, London EC1V 7RR Tel: (44 20) 7878 2900, Fax: (44 20) 7878 2999 Email: [email protected], Website: http://www.cepr.org
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The Centre for Economic Policy Research was established in 1983 as a private educational charity, to promote independent analysis and public discussion of open economies and the relations among them. It is pluralist and non-partisan, bringing economic research to bear on the analysis of medium- and long-run policy questions. Institutional (core) finance for the Centre has been provided through major grants from the Economic and Social Research Council, under which an ESRC Resource Centre operates within CEPR; the Esmée Fairbairn Charitable Trust; and the Bank of England. These organizations do not give prior review to the Centre’s publications, nor do they necessarily endorse the views expressed therein.
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Copyright: Juan J Dolado, Ramón María-Dolores and Manuel Naveira CEPR Discussion Paper No. 2441
April 2000
ABSTRACT
Asymmetries In Monetary Policy Rules: Evidence For Four Central Banks*
This Paper investigates the possible existence of asymmetric effects in the response of four central banks to inflation and output gaps as regards the ‘sign’ and ‘size’ of those gaps. The evidence obtained both through the estimation of a generalized Taylor rule and an ordered probit model points out that most central banks show a stronger reaction to inflation upswings relative to downswings. However, except for the Federal Reserve, no asymmetric behaviour with respect to the output gap is found.
JEL Classification: E52, E58 Keywords: Taylor rules, asymmetries, ordered probit models
Juan J Dolado Ramón María-Dolores Departamento de Economía Dpto. de Fundamentos del Análisis Universidad Carlos III de Madrid Económico C/. Madrid, 126 Universidad de Murcia 28903 Getafe (Madrid) Facultad de Economía y Empresa SPAIN Campus de Espinardo 30300 Tel: (34 91) 624 9300 Murcia Fax: (34 91) 624 9313 SPAIN Email: dolado@eco.uc3m.es Tel: (349 16) 24 9754 Fax: (349 16) 24 9875 Email: [email protected]
Manuel Naveira BBVA Vía de Los poblados s/n Segunda planta 28033 Madrid SPAIN Tel: (34 91) 537 9766 Fax: (34 91) 624 9313 Email: [email protected] * This Paper is produced as part of a CEPR research network on New Approaches to the Study of Economic Fluctuations, funded by the European Commission under the Training and Mobility of Researchers Programme (Contract No ERBFMRX-CT98-0213). The authors thank seminar participants at CEMFI and at the European Central Bank.
Submitted 28 March 2000 NON-TECHNICAL SUMMARY
This Paper studies the possible asymmetric nature of the preferences of central banks regarding inflation and output. The motivation of our work stems from some recent literature that suggests that the reaction of central banks, in terms of interventions through changes in a short-term interest rate, to deviations in the paths of both variables from their target levels may be asymmetric.
On the one hand, some authors have suggested that since central banks often deny the possibility that an expansionary policy may even have short-run real effects, say, on cyclical unemployment, it is likely that they will react differently with respect to positive and negative deviations of inflation from a target rate. On the other hand, it has been argued that central banks may have greater aversion to recession than to expansions and, therefore, may react with more virulence to negative output gaps than to positive ones.
To test for asymmetric behaviour, in the sense defined above, we use two empirical strategies. First, we estimate forward-looking Taylor rules allowing for different responses to both inflation and output gaps, according to their ‘sign’ and ‘size’. Secondly, the above analysis is complemented with the estimation of an ordered probit model which analyses the determinants of the probabilities associated to the decisions on increasing, decreasing or keeping unchanged the interest rate under control. For both exercises, we use data from the European central banks (Bundesbank, Banque de France and Banco de España and from the Federal Reserve. The sample periods are 1980(8)– 1997(12), 1988(7)–1997(12), 1989(5)–1997(12) and 1979(1)–1997(12), respectively.
As regards the inflation target, we depart from the standard assumption of constancy, and instead assume that it has time variation. The targets are obtained from various sources comprising: the Bundesbank reports for Germany; the German interest rate for France; the public budget laws for Spain; and the Council of Economic Advisors reports for the US. As for the output gaps, we use deviations from the Industrial Production Index in each country with respect to a HP filter.
The overall evidence seems to clearly support the belief that central banks intervene much more strongly when inflation moves above target than when it does below it. This has been particularly the case of the Bundesbank where an excess inflation of one percentage point above target triggers an increase of 1.8 percentage points in the interest rate, whereas there is hardly any reaction when the opposite case takes place. The results for the remaining central banks go in the same direction though they are weaker. By contrast, with the exception of the Federal Reserve, which seems to react strongly to recessions, the three European central banks do not seem to react differently to ups and downs in the output gap. 4Lqwurgxfwlrq
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54 Table 1: Estimated Reaction functions for Central Banks GE FR SP US k = 12 k = 12 k = 12 k = 12 k = 12 k = 12 k = 12 k = 12 k = 12 k = 12 k = 12 k = 12 p = 0 p = 6 p = 6 p = 0 p = 6 p = 6 p = 0 p = 6 p = 6 p = 0 p = 6 p = 6 :94 :96 :95 :85 :86 :87 :93 :94 :96 1:25 1:24 1:17 ½ 1 (:02) (:01) (:02) (:02) (:02) (:02) (:02) (:02) (:02) (:07) (:06) (:06) ------0.32 -0.31 -0.37 ½ 2 ------(.06) (.07) (.06) 5:75 5:77 5:84 5:72 5:68 5:81 5:86 5:93 6:05 7:20 7:21 6:94 ¹i (:44) (:53) (:49) (:29) (:33) (:34) (:84) (:64) (:98) (:73) (:82) (:38) 1:45 1:31 1:09 :41 :39 :42 :53 :49 :51 1:21 1:23 1:81 ¯ 1 (:63) (:65) (:31) (:14) (:15) (:11) (:20) (:18) (:15) (:32) (:35) (:14) :28 :47 :54 :13 :09 :21 :45 :20 :45 :90 :79 :82 ¯ 2 (:13) (:23) (:21) (:07) (:06) (:17) (:33) (:11) (:26) (:41) (:31) (:24) :19 :23 :25 :91 :93 :92 :05 ¯ ¡ ¡ ¡ ¡ ¡ 31 (:11) (:14) (:15) (:57) (:54) (:55) (:006) ¡ ¡ ¡ ¡ ¡ :14 :87 :82 :85 1:23 1:19 1:52 :06 ¯ ¡ ¡ ¡ ¡ 32 (:06) (:19) (:21) (:22) (:40) (:31) (:71) (:006) ¡ ¡ ¡ ¡ ¾" .34 .35 .31 .69 .71 .70 .71 .73 .72 .78 .80 .79 p .09 .04 .08 .11 .16 .14 .13 .04 .16 .16 .07 .11 USA GE~Germany Xt = it Sample Period 1980:08 1997:12 G FR~France Xt = ¢rert; it Sample Period 1988:07 1997:12 G SP~Spain Xt = ¢rert; it Sample Period 1989:05 1997:12 US~USA Xt = ¢trt; ¢nbrt Sample Period 1979:01 1997:12 Note: Standard errors in parentheses. ½; is the p-value of the J-test for overidentifying restrictions Wdeoh 5= Whvw iru dv|pphwulf uhvsrqvh wr lq dwlrq jds Jhupdq| Iudqfh Vsdlq XV K = n @ 3 n 3 s J n 3 s n 3 s n 3 s n @45 4=;9 =59 133: =98 =56 =43 =6< 4=44 3=;3 s @3 +=65, +=53, 137 137 1335 +=49, +=3:, +=37, +=43, +=78, +=68, n @45 4=:< =4< 1339 =9; =54 =3< =65 4=39 3=93 s @9 +=68, +=49, 137 13: 1334 +=48, +=3<, +=37, +=44, +=7;, +=5<, n @45 4=9; =5< =95 =4< =3; =6: 4=46 3=8: s @9 133; 136 138 1335 +=5;, +=55, +=46, +=3;, +=37, +=45, +=56, +=56, . [| n 3 Qrwh= Vwdqgdug huuru lq sduhqwkhvhv> s lv wkh ydoxh ri Kf = @ Wdeoh 6= Whvw iru qrq0sursruwlrqdo uhvsrqvh wr lq dwlrq jds KJ = @3 f s =;: =43 Jhupdq| 136< +=6:, +=38, =6< =44 Iudqfh 134; +=48, +=37, =77 =3; Vsdlq 1386 +=4<, +=37, 6=3< =49 XVD 1338 +=:7, +=34,
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