Art der Publikation: Diskussionsbeitrag

(How) Do the ECB and the Fed React to Financial Market Uncertainty? - The Taylor Rule in Times of Crisis

Belke, A.; Klose, J.
DIW Discussion Paper 972, Ruhr Economic Paper 166, ROME Discussion Paper Series 10-01
Berlin, Essen
Subprime crisis, Federal Reserve, European Central Bank, equilibrium real interest rate, Taylor rule
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We assess differences that emerge in Taylor rule estimations for the Fed and the ECB before
and after the start of the subprime crisis. For this purpose, we apply an explicit estimate of the
equilibrium real interest rate and of potential output in order to account for variations within
these variables over time. We argue that measures of money and credit growth, interest rate
spreads and asset price inflation should be added to the classical Taylor rule because
these variables are proxies of a change in the equilibrium interest rate and are, thus, also
likely to have played a major role in setting policy rates during the crisis.
Our empirical results gained from a state-space model and GMM estimations reveal that, as
far as the Fed is concerned, the impact of consumer price inflation, and money and credit
growth turns negative during the crisis while the sign of the asset price inflation coefficient
turns positive. Thus we are able to establish significant differences in the parameters of the
reaction functions of the Fed before and after the start of the subprime crisis. In case of the
ECB, there is no evidence of a change in signs. Instead, the positive reaction to credit growth,
consumer and house price inflation becomes even stronger than before. Moreover we find
evidence of a less inertial policy of both the Fed and the ECB during the crisis.

JEL code: E43, E52, E58