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Asset Prices as Indicators of Euro Area Monetary Policy: An Empirical Assessment of Their Role in a Taylor Rule

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Author Info
P. Siklos & M. Bohl () (Wilfrid Laurier University)

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Abstract

This paper estimates standard and extended Taylor rules for core countries in the euro area, namely France, Germany and Italy, as well as for the ECB. We perform extensive tests for over-identifying restrictions and instrument relevance, a practice generally eschewed in previous work. We find that asset prices can be highly relevant as instruments rather than as separate arguments in policy rules. Forecast-based rules perform best using the root mean squared error metric but produce coefficients implying that central banks may be too aggressive at fighting inflation.

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File URL: http://www.wlu.ca/documents/22941/Siklos_Bohl_BBkII_March32006.pdf
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Publisher Info
Paper provided by Wilfrid Laurier University, Department of Economics in its series Working Papers with number eg0053.

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Length: 40
Date of creation: 2006
Date of revision: 2006
Handle: RePEc:wlu:wpaper:eg0053

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Related research
Keywords: Monetary policy reaction functions; asset prices; instruments; European Central Bank;

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing

References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Andrew Hughes Hallett & Jan Libich & Petr Stehlik, 2009. "Financial Instability Prevention," CAMA Working Papers 2009-14, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
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