How has European Monetary Policy Changed since the creation of the ECB? Estimation of Taylor Rule for the EMU (1991-2005)

This paper aims to use a Taylor Rule to characterise the monetary policy applied by the ECB and to test whether there are significant differences compared to the monetary policy applied in the previous years by the central banks of the 12 countries currently forming part of the EMU. We see that the Taylor rule estimated to characterise the 1991-1998 period does not correctly reflect the behaviour of the ECB and a Chow test confirms the existence of a structural change from that date on. This change supposes a reduction in the neutral real interest rate and a change in the rule’s coefficients, with an increase in the output gap coefficient and an important decrease in the response to inflation deviations. Another result derived from our estimates is that interest rates are associated to a high level of inertia. However, the introduction of other variables into the rule, such as the Federal Reserve interest rate, variation in the real euro-dollar exchange rate or deviation of the M3 growth rate from the reference value established by the ECB, is of little significance when explaining interest rate variations.