Kiel Working Papers, Kiel Institute for World Economics
No 1221:
Did the Revision of the ECB Monetary Policy Strategy Affect the Reaction Function?
Kai Carstensen and Roberta Colavecchio
Abstract: In May 2003 the European Central Bank (ECB) announced the
revision of its monetary policy strategy. Although the ECB stressed that
the revision would not imply any fundamental change in their decisions,
this remains to be verified empirically. Therefore, this paper tries to
answer the question whether the strategy revision has induced a structural
break in the ECB policy reaction function. To this end, we estimate several
Taylor-type reaction functions and conduct a structural change analysis
using both recursive parameter estimates and structural change tests. We
find that the ECB has been following a stabilizing rule and that there is
no clear-cut evidence in favor of a break after the revision, even though
some signals of instability show up, particularly in June 2003.
31 pages, July 2004
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