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What Monetary Authorities do - an Examination of Reaction Functions for Germany, Japan, the UK and the US

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  • Jagjit S. Chadha
  • Norbert G. J. Janssen

Abstract

Following the end of the Bretton Woods system, national monetary authorities adopted various forms of feedback rule for monetary policy. This paper investigates the role of discretion in following stated rules. We motivate a simple reaction function for monetary authorities' official interest rates which may operate regardless of the stated policy. The reaction function is tested for Germany, Japan, the UK and the US with quarterly cyclical data since 1971. We find reasonable evidence to suggest that it is possible to characterise official rates as reacting to a similar set of cyclical variables, across countries and through time, irrespective of the declared policy rule. The differences in relative weights attached to feedback variables do not seem to be explained by stated policy rules.

Suggested Citation

  • Jagjit S. Chadha & Norbert G. J. Janssen, 1997. "What Monetary Authorities do - an Examination of Reaction Functions for Germany, Japan, the UK and the US," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 133(III), pages 455-476, September.
    • Handle: RePEc:ses:arsjes:1997-iii-9
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    1. Bernanke, Ben S. & Mihov, Ilian, 1997. "What does the Bundesbank target?," European Economic Review, Elsevier, vol. 41(6), pages 1025-1053, June.
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    5. King, Mervyn, 1995. "Credibility and Monetary Policy: Theory and Evidence," Scottish Journal of Political Economy, Scottish Economic Society, vol. 42(1), pages 1-19, February.
    6. Bennett T. McCallum, 2005. "Monetary policy and the term structure of interest rates," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 91(Fall), pages 1-21.
    7. Fischer, Stanley, 1990. "Rules versus discretion in monetary policy," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 21, pages 1155-1184, Elsevier.
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    Cited by:

    1. David Cobham & Yue Kang, 2013. "Time Horizons and Smoothing in the Bank of England's Reaction Function: The Contrast Between the Standard GMM and Ex Ante Forecast Approaches," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(5), pages 662-679, October.

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