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Die durch die große Finanzkrise induzierten hohen Schuldenquoten zwingen die Staaten zu Maßnahmen des Schuldenabbaus. Financial Repression bietet dafür Möglichkeiten. Sie entsteht, wenn staatliche Instanzen den Finanzmärkten Maßnahmen oktroyieren und manifestiert sich in erster Linie in niedrigen Realzinsen. Financial Repression wird als weiteres Charakteristikum einer 'neuen Normalität' der Weltwirtschaft mit niedrigen Potenzialwachstumsraten und Zinssätzen sowie hohen staatlichen Schuldenständen angesehen. Der Beitrag stellt dieses Charakteristikum vor und beurteilt seine empirische Relevanz. High levels of debt caused by the financial crisis are forcing countries to take measures to reduce debt. Financial repression is a debt reduction opportunity based on measures imposed on the financial markets by governments which manifests itself primarily in lower real interest rates. Financial repression is regarded as another characteristic of a 'new normality' in the global economy with low potential growth rates and low interest rates, high levels of public debt as a result of the financial crisis. The article describes this phenomenon and attempts to evaluate its empirical relevance.

Für Thomas Mayer, Deutsche Bank, erscheint es sinnvoll, dass die EZB den Leitzins auf sein neutrales Niveau hochführt. Noch wichtiger für die Wahrung der Stabilität des Euro wäre es aber, dass sich die EZB aus der Finanzierung von durch Insolvenz bedrohten Staaten und ihren Banken zurückzieht. Holger Schmieding, Berenberg Bank, sieht keine Inflationsgefahr. Er rechnet für Deutschland mit einem jährlichen Preisanstieg von gut 2%. Manfred Jäger-Ambroz.ewicz, Institut der deutschen Wirtschaft Köln, vertritt die Meinung, dass die EZB eine sachgerechte Leitzinspolitik umsetzt und einen angemessenen Leitzinspfad suggeriert. Michael Lamla und Jan-Egbert Sturm, ETH Zürich, betonen, dass die EZB genügend Glaubwürdigkeit und Transparenz besitzt, um die Inflationserwartungen zu beeinflussen und zu homogenisieren. Ihrer Ansicht nach steigen insgesamt die Inflationserwartungen im Euroraum für das nächste Jahr weiterhin an, ohne aber beunruhigende Werte anzunehmen. Auch Ulrich Kater, DekaBank, sieht die Glaubwürdigkeit des Inflationsregimes mit der Geldwertstabilität als wichtigster Zielsetzung unabhängiger Notenbanken nicht gefährdet. Leon Leschus, HWWI, geht davon aus, dass hohe Rohstoffpreise weiterhin zum Inflationsdruck beitragen werden. Es wäre somit wünschenswert, wenn die EZB ihre begonnene restriktive Geldpolitik fortsetzen würde. Hans Wolfgang Brachinger, Universität Fribourg, sieht angesichts teurer Rohstoffe, zunehmender Spekulation und steigender Produktionskosten in China die Inflationsrisiken in Deutschland wachsen, und zwar unabhängig vom Handeln der EZB.

During the fi nancial crisis the ECB has done its job quite properly. To secure an adequate provision of liquidity its monetary policy framework had not needed to be adjusted in fundamental ways. Interest rate policy was conducted under the infl uence of still sound economic fundamentals and high and rising consumer price infl ation until summer 2008. Thus, the interest rate hike in July was justifi able, although not imperative. Thereafter, the sudden deterioration of the business cycle and the increased strain in the money market forced the ECB to switch over to an expansionary policy stance. At the same time the ECB eased access to central bank liquidity in the face of a dried up money market. Die EZB hat während der Finanzkrise insgesamt die richtigen Entscheidungen getroffen. Das moderne und flexible geldpolitische Instrumentarium musste im Verlauf der Krise nur wenig angepasst werden, um die Banken ausreichend mit Liquidität zu versorgen. Die Zinspolitik stand bis zum Sommer 2008 unter dem Eindruck der hohen und steigenden Inflation der Verbraucherpreise und einer noch soliden realwirtschaftlichen Entwicklung. Die Zinserhöhung im Juli 2008 war daher vertretbar, aber nicht zwingend. Als Reaktion auf die ruckartige Eintrübung der Konjunktur und die Zuspitzung der Finanzmarktkrise im September 2008 schwenkte die EZB zu Recht auf einen deutlich expansiven geldpolitischen Kurs ein. Gleichzeitig erleichterte sie den Zugang zur Refinanzierung angesichts eines weitgehend ausgetrockneten Interbankenhandels.

Die Europäische Zentralbank erhebt seit Mitte 2014 Negativzinsen für Bankeinlagen. Seit Herbst letzten Jahres wird diese Entwicklung von einigen Banken an Privatanleger mit sehr hohen Gesamteinlagen weitergegeben. Hans-Peter Burghof, Universität Hohenheim, sieht in einem »Minuszins« einen »unmöglichen Zins«, der die Erwartungen der Sparer enttäuscht. Für Max Otte, Universität Graz, begünstigt das Niedrigzinsumfeld die Entstehung und Vermehrung großer Vermögen und behindert die Vermögensbildung bei breiten Bevölkerungsschichten. Der öffentliche Sektor sei ebenfalls Gewinner dieser Politik. Nach Ansicht von Tobias Tröger, Goethe-Universität Frankfurt am Main, können im Rahmen bestehender Einlageverträge negative Zinsen nicht erhoben werden. Für Ansgar Belke, Universität Duisburg-Essen, handelt es sich bei Negativzinsen um eine Marktverzerrung: Negative Zinssätze lassen Gläubiger für das Privileg der Schuldner zahlen, dass die Kreditnehmer das Geld der Kreditgeber verwenden dürfen – ein Arrangement, das Fundamentalprinzipien der Finanzierungslehre verletzt. Thorsten Polleit, Degussa und Universität Bayreuth, ist der Meinung, dass das Senken des Marktzinses auf 0% oder sogar in den negativen Bereich für eine Politik steht, die unvereinbar ist mit einer freien Marktwirtschaft. Ein negativer realer Marktzins beende den Zinsbezug und nehme damit den Anreiz zu sparen und zu investieren, die Volkswirtschaft verfalle dem Kapitalverzehr. Für Martin Klein, Martin-Luther-Universität Halle-Wittenberg, ist die Erfahrung mit negativen Zinsen bei der EZB und bei Geschäftsbanken bisher noch zu kurzfristig, um ein abschließendes Urteil zuzulassen. Entscheidend für die Zukunft werden, seiner Ansicht nach, vor allem die Auswirkungen der ab dem Frühjahr ins Haus stehenden massiven Liquiditätsausweitung im Rahmen der Geldpolitik der EZB sein. Sie werden das Zinsgefüge weiter nach unten verschieben.

Sowohl in den USA als auch in Großbritannien ist in naher Zukunft mit einer Zinswende zu rechnen. Die Länder des Euroraums sind davon sicher unterschiedlich betroffen. Die Autoren stellen die wichtigsten Transmissionskanäle der internationalen Übertragung der geldpolitischen Impulse dar und quantifizieren die Effekte einer Anhebung der Zinsen in den USA und in Großbritannien auf die heimische Wirtschaft sowie auf ausgewählte Länder des Euroraums mit Hilfe des RWI-Mehrländermodells. Parallel dazu werden die Auswirkungen einer anhaltenden Abwertung des Euro infolge der jüngsten Lockerung der Geldpolitik durch die EZB ermittelt. While the U.S. and the U.K. are likely to experience an interest rate turnaround in the near future, monetary conditions in the euro area will remain highly accommodative for a long time. The qualitative and quantitative effects of diverging monetary positions between major central banks are expected to have highly heterogeneous effects across the euro area. Thus, the reassessment of international monetary policy transmission mechanism seems relevant and timely. Simulations with the RWI-Multi Country Model quantify the effects of the interest rate hike in the U.S. and in the U.K. on domestic and eurozone economies along with the impact of the depreciation of the euro as a consequence of the recent ECB's quantitative easing move.

While there is ample evidence how central bank communication and interest rate decisions are perceived by financial markets, insights regarding the response of the public is lacking. Media is known to be an important transmitter of news to the public. Based on articles in the Financial Times Europe, we test how expectations on the future course of monetary policy presented in the media are affected by central bank communication and interest rate decisions., KOF Working Papers, 334

This paper explicitly models strategic interaction between two independent national fiscal authorities and a single central bank in a simple New Keynesian model of a monetary union. Monetary policy is constrained by the zero lower bound on nominal interest rates. Coordination of fiscal policies does not always lead to the best welfare effects. It depends on the nature of the shocks whether governments prefer to coordinate or not coordinate. The size of the government multipliers depend on the combination of the intraunion competitiveness parameters. They get larger in case of implementation lags of fiscal policy.

Die Leitzinsen der Zentralbanken sind ein bedeutendes Politikinstrument. Weil jedoch Zentralbänker und nicht Regierungen die Leitzinsen bestimmen, haben Politiker einen Anreiz, Zentralbänker derart zu beeinflussen, dass die Zinssätze nach dem Belieben der Politik verändert werden. Niklas Potrafke untersuchte zusammen mit Ansgar Belke, Universität Duisburg-Essen, für 23 OECD-Länder über den Zeitraum 1980 bis 2005, wie Regierungsideologie die Nominalzinssätze beeinflusst hat.

Die bisherigen Ansätze zur Lösung der Finanz- und Wirtschaftskrise setzen alle bei dem Realteil der Wirtschaft an. Jede Transaktion besteht jedoch aus Leistung und Gegenleistung. Reiner Peter Hellbrück, Universität Hohenheim, sucht nach den Bestimmungsgründen von Leistungsbilanzsalden bei der Finanzierung und zeigt, dass durch eine regionale Zinspolitik ein geldpolitischer Hebel vorhanden ist, der geeignet erscheint, die Leistungsbilanzströme umzukehren.

A view advanced in the aftermath of the late-2000s financial crisis is that lower than optimal interest rates lead to excessive risk taking by financial intermediaries. We evaluate this view in a quantitative dynamic model in which interest rate policy affects risk taking by changing the amount of safe bonds that intermediaries use as collateral in the repo market. In this model with properly-priced collateral, lower than optimal interest rates reduce risk taking. We also consider the possibility that intermediaries can augment their collateral by issuing assets whose risk is underestimated by credit rating agencies, as was observed prior to the crisis. In the presence of such mispriced collateral, lower than optimal interest rates contribute to excessive risk taking and amplify the severity of recessions., La crise financière de la fin des années 2000 en a amené plusieurs à soutenir que des taux d’intérêt inférieurs au taux optimal encouragent la prise de risques excessifs par les intermédiaires financiers. Pour déterminer ce qu’il en est, les auteurs recourent à un modèle dynamique quantitatif dans lequel la politique de taux d’intérêt influe sur la prise de risque en modifiant le volume des obligations sûres que les intermédiaires utilisent en garantie d’emprunts sur le marché des pensions. Lorsque les garanties sont évaluées correctement, le maintien de taux d’intérêt inférieurs au taux optimal réduit la prise de risque. Les auteurs examinent aussi la possibilité que les intermédiaires augmentent leur volume de garanties en émettant des actifs dont le risque est sous-estimé par les agences de notation, comme ce fut le cas avant la crise. En présence de garanties mal évaluées, de tels taux d’intérêt contribuent à la prise de risques excessifs et amplifient la gravité des récessions.

Using a version of the Smets-Wouters model of the US economy augmented to include both New Keynesian and New Classical sectors, this paper investigates the performance of inflation targeting and price-level targeting when the zero lower bound on nominal interest rates is occasionally-binding. Several notable results emerge. First, the unconditional probability of hitting the lower bound is lower under price-level targeting than inflation targeting, with 'lower bound episodes' being less frequent and lasting for shorter periods of time. Second, the volatilities of key macroeconomic variables are lower under price-level targeting than inflation targeting. Third, the lower frequency and severity of lower bound episodes under price-level targeting appears to have a first-order impact on consumption, investment and output, raising their mean values. Intuitively, price-level targeting performs well because inflation expectations act as automatic stabilisers, reducing the chance of hitting or remaining at the lower bound whilst also providing stability when the economy is away from the lower bound.

This paper examines which macroeconomic and financial variables are most informative for the federal funds target rate decisions made by the Federal Open Market Committee (FOMC) from a forecasting perspective. The analysis is conducted for the FOMC decision during the period January 1990 - June 2008, using dynamic ordered probit models with a Bayesian endogenous variable selection methodology and real-time data for a set of 33 candidate predictor variables. We find that indicators of economic activity and forward-looking term structure variables as well as survey measures have most predictive ability. For the full sample period, in-sample probability forecasts achieve a hitrate of 90 percent. Based on out-of-sample forecasts for the period January 2001 - June 2008, 82 percent of the FOMC decisions are predicted correctly.

How should monetary policy respond to changes in financial conditions? In this paper we consider a simple model where firms are subject to idiosyncratic shocks which may force them to default on their debt. Firms’ assets and liabilities are denominated in nominal terms and predetermined when shocks occur. Monetary policy can therefore affect the real value of funds used to finance production. Furthermore, policy affects the loan and deposit rates. In our model, allowing for short-term inflation volatility in response to exogenous shocks can be optimal; the optimal response to adverse financial shocks is to lower interest rates, if not at the zero bound, and to engineer a short period of controlled inflation; the Taylor rule may implement allocations that have opposite cyclical properties to the optimal ones. JEL Classification: E20, E44, E52

The recent financial crisis deeply affected the money market yield curve and thus, potentially, the proper functioning of the interest rate channel of monetary policy transmission. Therefore, we analyze the effectiveness of monetary policy in steering euro area money market rates using two measures: first, the predictability of money market rates on the basis of monetary policy expectations, and second the impact of extraordinary central bank measures on money market rates. We find that market expectations about monetary policy are less relevant for money market rates up to 12 months after August 2007 compared to the pre-crisis period. At the same time, our results indicate that the ECB’s net increase in outstanding open market operations as of October 2008 accounts for at least a 100 basis point decline in Euribor rates. These findings show that central banks have effective tools at hand to conduct monetary policy in times of crises.

We examine monetary policy options for a small open economy where sovereign default might occur due to intertemporal insolvency. Under interest rate policy and floating exchange rates the equilibrium is indetermined. Under a fixed exchange rate the equilibrium is uniquely determined and independent of sovereign default., Discussion Paper / SFB 823 ; 07/2011

I find that the Eurosystem can stimulate the economy beyond the policy rate by increasing the size of its balance sheet or the monetary base, that is so-called quantitative easing. The transmission mechanism turns out to be different compared to traditional interest rate innovations: (i) whilst the effects on economic activity and consumer prices reach a peak after about one year for an interest rate innovation, this is more than six months later for a shift in the monetary base that is orthogonal to the policy rate (ii) interest rate spreads charged by banks decline persistently after quantitative easing policies, whereas the spreads increase significantly after a fall in the policy rate (iii) there is no significant short-run liquidity effect after an interest rate innovation, that is additional bank loans are generated by a greater credit multiplier. In contrast, the multiplier declines considerably after an expansion of the Eurosystem's balance sheet.

This paper provides a detailed survey of the economic literature comparing inflation and price-level targeting as macroeconomic stabilisation policies. Its contributions relative to past surveys are as follows. First, rather than focusing on any particular topic, the survey gives equal emphasis to all key areas of the literature. Second, the paper discusses 'new results' in several areas, including the zero lower bound on nominal interest rates; the long-term impact of price-level targeting; and financial market considerations. Finally, the survey is written in such a way that it can be understood by economists with little or no prior knowledge of price-level targeting and the related academic literature. The survey concludes that whilst price-level targeting has a number of potential advantages, further research is needed to accurately quantify its costs and benefits and to test robustness. Potential obstacles to the introduction of price-level targeting in practice include: concerns about its credibility; lack of public understanding; and lack of prior experience with price-level targeting regimes.

This paper investigates why financial market experts misperceive the interest rate policy of the European Central Bank (ECB). Assuming a Taylor-rule-type reaction function of the ECB, we use qualitative survey data on expectations about the future interest rate, inflation, and output to discover the sources of in- dividual interest rate forecast errors. Based on a panel random coefficient model, we show that financial experts have systematically misperceived the ECB's in- terest rate rule. However, although experts tend to overestimate the impact of inflation on future interest rates, perceptions of monetary policy have become more accurate since clarification of the ECB's monetary policy strategy in May 2003\. We find that this improved communication has reduced disagreement over the ECB's response to expected inflation during the financial crisis.

I propose a discrete choice method for estimating monetary policy reaction functions based on research by Hu and Phillips (2004). This method distinguishes between determining the underlying desired rate which drives policy rate changes and actually implementing interest rate changes. The method is applied to ECB rate setting between 1999 and 2010 by estimating a forward-looking Taylor rule on a monthly basis using real-time data drawn from the Survey of Professional Forecasters. All parameters are estimated significantly and with the expected sign. Including the period of financial turmoil in the sample delivers a less aggressive policy rule as the ECB was constrained by the lower bound on nominal interest rates. The ECB's non-standard measures helped to circumvent that constraint on monetary policy, however. For the pre-turmoil sample, the discrete choice model's estimated desired policy rate is more aggressive and less gradual than least squares estimates of the same rule specification. This is explained by the fact that the discrete choice model takes account of the fact that central banks change interest rates by discrete amounts. An advantage of using discrete choice models is that probabilities are attached to the different outcomes of every interest rate setting meeting. These probabilities correlate fairly well with the probabilities derived from surveys among commercial bank economists.

We argue that it is not necessary for the central bank to react to the exchange rate to have a desirable outcome in the economy. Indeed, when the Taylor rule includes contemporane-ous data on the variables in the rule, the central bank can disregard from the exchange rate as long as there is enough with interest rate inertia in monetary policy. The reason is that interest rate inertia and a reaction to the current nominal exchange rate change are perfect substitutes in monetary policy. Hence, we give a rationale for the central bank to focus on the interest rate change rather than the interest rate level to have a desirable outcome in the economy, which we define as a determinate rational expectation equilibrium that is stable under least squares learning.

This paper investigates to what extent Chinese monetary policy is constrained by the dollar peg. To this end, we use a cointegration framework to examine whether Chinese interest rates are driven by the Fed's policy. In a second step, we estimate a monetary model for China, in which we include also other monetary policy tools besides the central bank interest rate, namely reserve requirement ratios and open market operations. Our results suggest China has been relatively successful in isolating its monetary policy from the US policy and that the interest rate tool has not been effectively made use of. We therefore conclude that by employing capital controls and relying on other instruments than the interest rate China has been able to exert relatively autonomous monetary policy.

The relation between the ECB’s main refinancing (MRO) rates and the money market is key for the monetary transmission process in the euro area. This paper investigates how money market rates respond to the new information revealed by MRO auctions. Our results confirm a stabilizing level relationship between the overnight rate Eonia and MRO rates before the financial crisis. Since the start of the financial crisis, however, we find that MRO auction outcomes even exacerbated the disconnection of money market rates from the policy-intended interest rate level. These findings support the fixed rate full allotment policy introduced by the ECB as an unconventionalmeasure to re-stabilize banks’ refinancing conditions.

In this paper, we study the influence of central bank transparency and informal central bank communication on the money market adjustment process between two interest rate decisions. The sample covers nine major central banks for the period from January 1999 to July 2007. We find, first, that both transparency and communication facilitate understanding upcoming interest rate decisions. Second, transparency, as measured by various subcategories of the Eijffinger and Geraats (2006) index, leads to better anticipation of monetary policy. Provision of information on (unanticipated) macroeconomic disturbances and explicit prioritization of central bank objectives are the most important of these subcategories. Finally, there is no unique optimal design for central banks as (i) a very high degree of transparency, (ii) frequent communication on an informal basis, (iii) gradualism in target rate changes, or (iv) a high frequency of interest rate decisions all contribute to sound understanding regarding future interest rate decisions.

We apply the asymmetric ARDL model advanced by Shin, Yu and Greenwood-Nimmo (2009) to the analysis of the patterns of pass-through from policy-controlled interest rates to a variety of longer-term rates in the U.S. and Germany. Our results reveal three main phenomena. Firstly, while the e®ect of a rate hike is largely con¯ned to the short-run, the e®ect of a rate cut is muted in the short-run but non-negligible at longer horizons. We characterise this pattern as a switch from short-run positive asymmetry to long-run negative asymmetry, a pattern that potentially reconciles the con°icting empirical evidence and theoretical conjectures that dominate the existing literature. Secondly, our results con¯rm that there has been a decoupling of long-term rates from policy-controlled rates during the period of the Great Moderation in both the U.S. and Germany, albeit in a complex and nonlinear way. Thirdly, by replicating Taylor's (2007) counterfactual exercise using our asymmetric models, we ¯nd that Taylor over-estimates the importance of policy-controlled rates for the broader economy. Equivalently, our results do not support Greenspan's belief that the decoupling is a recent phenomenon. In light of our findings, we conclude that a narrow focus on the interest rate as the sole instrument of monetary policy is likely to be sub-optimal under current institutional arrangements.

This paper investigates why financial market experts misperceive the interest rate policy of the European Central Bank (ECB). Assuming a Taylor-rule-type reaction function of the ECB, we use qualitative survey data on expectations about the future interest rate, inflation, and output to discover the sources of in- dividual interest rate forecast errors. Based on a panel random coefficient model, we show that financial experts have systematically misperceived the ECB's in- terest rate rule. However, although experts tend to overestimate the impact of inflation on future interest rates, perceptions of monetary policy have become more accurate since clarification of the ECB's monetary policy strategy in May 2003. We find that this improved communication has reduced disagreement over the ECB's response to expected inflation during the financial crisis.

A major lesson of the recent financial crisis is that the interbank lending market is crucial for banks facing large uncertainty regarding their liquidity needs. This paper studies the efficiency of the interbank lending market in allocating funds. We consider two different types of liquidity shocks leading to di¤erent implications for optimal policy by the central bank. We show that, when confronted with a distribu- tional liquidity-shock crisis that causes a large disparity in the liquidity held among banks, the central bank should lower the interbank rate. This view implies that the traditional tenet prescribing the separation between prudential regulation and mon- etary policy should be abandoned. In addition, we show that, during an aggregate liquidity crisis, central banks should manage the aggregate volume of liquidity. Two di¤erent instruments, interest rates and liquidity injection, are therefore required to cope with the two di¤erent types of liquidity shocks. Finally, we show that failure to cut interest rates during a crisis erodes financial stability by increasing the risk of bank runs.

This paper studies whether the observed high correlation between monetary policy in the U.S. and the Euro area can be explained by economic fundamentals, i.e. by macroeconomic interdependence between the two regions. We show that an optimal monetary policy reaction function for the ECB that accounts explicitly for economic interrelationships between the two economies reproduces substantial parts of the observed patterns of interest rate correlation and represents a good approximation to the actually observed monetary policy of the ECB. It implies strong reactions to shocks to US variables, particularly to shocks to the Federal Funds Rate.

In this paper we model the volatility of the spread between the overnight interest rate and the central bank policy rate (the policy spread) for the euro area and the UK during the two main phases of the financial crisis that began in late 2007. During the crisis, the policy spread exhibited signs of volatility, owing to the breakdown in interbank market activity. The determinants of this volatility are assessed using Stochastic Volatility models to gauge the role played by liquidity risk, credit risk (financial and sovereign), and interest rate expectations. Our results suggest that liquidity risk is the main determinant of the volatility of the policy spread, but also that private bank credit risk has become more apparent in the post-Lehman collapse phase of the crisis for the euro area as financial CDS premia rose due to possible default fears. In addition, the ECB appears to have been more effective in addressing liquidity risk since the onset of the crisis, and this may be related to its greater direct access to a broader range of counterparties and its acceptance of a broader range of eligible collateral. The main implication is that, in crisis times, a sufficiently flexible operational framework for monetary policy implementation produces the most timely response to market tensions.

The relation between the ECB's main refinancing (MRO) rates and the money market is key for the monetary transmission process in the euro area. This paper investigates how money market rates respond to the new information revealed by MRO auctions. Our results confirm a stabilizing level relationship between the overnight rate Eonia and MRO rates before the financial crisis. Since the start of the financial crisis, however, we find that MRO auction outcomes even exacerbated the disconnection of money market rates from the policy-intended interest rate level. These findings support the fixed rate full allotment policy introduced by the ECB as an unconventionalmeasure to re-stabilize banks' refinancing conditions.

Most empirical studies found that monetary policy has a significant effect on house prices while stock markets remain unaffected by interest rate shocks. In this paper we conduct a more detailed analysis by studying various sub-segments of the real estate market. Em-ploying a new dataset for Switzerland we estimate vector autoregressive models and find substitution effects between house and apartment prices on the one hand and rental prices on the other. Interestingly enough, commercial property prices do not react on interest rate variations.

Estimations of simple monetary policy rules are often very rigid. Standard practice requires that a decision is made as to which indicators the central bank is assumed to respond to, ignoring the data-rich environment in which policy-makers typically form their decisions. However, the choice of the feedback variables in the estimations of simple rules bears non-trivial implications for the prescriptions borne from these rules. This paper addresses this issue for the euro area using a new comprehensive real-time database for the euro area and examines the ECB’s past interest-rate setting behaviour in two complementary ways that are designed to deal with both model and data uncertainty. In a first step we follow the “thick-modelling” approach suggested by Granger and Jeon (2004) and estimate a series of 3,330 policy rules. In a second step we employ a factor-model approach similar to Bernanke and Boivin (2003) for the US Fed, but with structurally interpretable factors à la Belviso and Milani (2006). Taken together, we find a strong justification for the need of adopting robust approaches to describe the historical evolution of euro area monetary policy. We also find that the ECB is neither purely backward nor forward-looking, but reacts to a synthesis of the available information on the current and future state of the economy.

Controllability of longer-term interest rates requires that the persistence of their deviations from the central bank’s policy rate (i.e. the policy spreads) remains sufficiently low. This paper applies fractional integration techniques to assess the persistence of policy spreads of euro area money market rates along the yield curve. Independently from anticipated policy rate changes, there is strong evidence for all maturities that policy spreads exhibit long memory. We show that recent changes in the operational framework and the communication strategy of the European Central Bank (ECB) have significantly decreased the persistence of euro area policy spreads and, thus, have enhanced the ECB’s influence on longer-term money market rates.

Active interest rate policy is frequently recommended based on its merits in reducing macroeconomic volatility and being a simple and transparent policy device. In a standard New Keynesian model, we show that an even simpler policy, namely an interest rate peg, can be welfare enhancing: The minimum state variable solution and an autoregessive solution under a peg can lead to lower welfare losses than the unique solution under an active interest rate rule. Given that a peg is usually blamed to facilitate endogenous fluctuations, we further show that a peg can be implemented in a way that ensures equilibrium determinacy.

This paper examines equilibrium determination under different monetary policy regimes when the government might default on its debt. We apply a cash-in-advance model where the government does not have access to non-distortionary taxation and does not account for initial outstanding debt when it sets the income tax rate. Solvency is then not guaranteed and sovereign default can affect the return on public debt. If the central bank sets the interest rate in a conventional way, the equilibrium allocation cannot be determined. If, instead, money supply is controlled, the equilibrium allocation can uniquely be determined.

This paper reviews the rationale for quantitative easing when central bank policy rates reach near zero levels in light of recent announcements regarding direct asset purchases by the Bank of England, the Bank of Japan, the U.S. Federal Reserve and the European Central Bank. Empirical evidence from the previous period of quantitative easing in Japan between 2001 and 2006 is presented. During this earlier period the Bank of Japan was able to expand the monetary base very quickly and significantly. Quantitative easing translated into a greater and more lasting expansion of M1 relative to nominal GDP. Deflation subsided by 2005. As soon as inflation appeared to stabilize near a rate of zero, the Bank of Japan rapidly reduced the monetary base as a share of nominal income as it had announced in 2001. The Bank was able to exit from extensive quantitative easing within less than a year. Some implications for the current situation in Europe and the United States are discussed.

The maturity of the operational target of monetary policy is a distinguishing feature of the SNB's operational framework of monetary policy. While most central banks use targets for the overnight rate to signal the policy-intended interest rate level, the SNB announces a target range for the three-month Libor. This paper investigates the working and the consequences of the SNB's unique operational framework for the behavior of Swiss money market rates before and during the financial crisis.

Research with Keynesian-style models has emphasized the importance of the output gap for policies aimed at controlling inflation while declaring monetary aggregates largely irrelevant. Critics, however, have argued that these models need to be modified to account for observed money growth and inflation trends, and that monetary trends may serve as a useful cross-check for monetary policy. We identify an important source of monetary trends in form of persistent central bank misperceptions regarding potential output. Simulations with historical output gap estimates indicate that such misperceptions may induce persistent errors in monetary policy and sustained trends in money growth and inflation. If interest rate prescriptions derived from Keynesian-style models are augmented with a cross-check against money-based estimates of trend inflation, inflation control is improved substantially.

We develop simple diagrams that can be used by undergraduates to understand interest rate setting by policy-makers. We combine an inflation target, Fisher equation, policy reaction function and short and long run aggregate supply analysis to give a depiction of the policy problem. We illustrate the appropriate response by the policy maker to each of a positive shock to demand, a negative supply shock and dislodged inflation expectations. We also illustrate the problems of a zero bound for policy rates within this framework and consider the role of an interest rate rule in offsetting money market perturbations. Some key readings are introduced.

This paper compares two contrasting approaches to robust monetary policy design. The first developed by Hansen and Sargent (2003, 2007) assumes unstructured model uncertainty and uses a minimax robustness criterion to design monetary rules. This contrasts with an older literature that structures uncertainty by seeking rules that are robust across competing views of the economy. This paper carries out and compares robust design exercises using both approaches using a standard ‘canonical New Keynesian model’. We pay particular attention to a number of issues: First, we distinguish three possible forms of the implied game between malign nature and the policymaker in the Hansen-Sargent procedure. Second, in both approaches, we examine the consequences for robust rules of the zero lower bound (ZLB) constraint on the nominal interest rate, the monetary instrument. Finally, again for both types of robustness exercise we explore the implications of policy design when the policymaker is obliged to use simple Taylor-type interest rate rules.

Research with Keynesian-style models has emphasized the importance of the output gap for policies aimed at controlling inflation while declaring monetary aggregates largely irrelevant. Critics, however, have argued that these models need to be modified to account for observed money growth and inflation trends, and that monetary trends may serve as a useful cross-check for monetary policy. We identify an important source of monetary trends in form of persistent central bank misperceptions regarding potential output. Simulations with historical output gap estimates indicate that such misperceptions may induce persistent errors in monetary policy and sustained trends in money growth and inflation. If interest rate prescriptions derived from Keynesian-style models are augmented with a cross-check against money-based estimates of trend inflation, inflation control is improved substantially.

Despite substantial differences in monetary policy and communication strategies, many central banks share the practice of purdah, a self-imposed guideline of abstaining from communication around policy meetings or other important events. This practice is remarkable, as it seems to contradict the virtue of transparency by requiring central banks to withhold information precisely when it is sought after intensely. However, imposing such a limit to communication has often been justified on grounds that such communication may create excessive market volatility and unnecessary speculation. This short paper assesses the purdah for the Federal Reserve. The empirical results confirm the conjecture that financial markets are substantially more sensitive to central bank communication around policy meetings. Short-term interest rates react three to four times more strongly to statements in the purdah before FOMC meetings than during other times, and market volatility increases (compared to a volatility reduction induced by statements otherwise). The findings thus offer relevant insights about the limits to central bank transparency.

The paper derives the monetary policy reaction function implied by money growth targeting. It consists of an interest rate response to deviations of the inflation rate from target, to the change in the output gap, to money demand shocks and to the lagged interest rate. In the second part, it is shown that this type of inertial interest rate rule characterises the Bundesbank's monetary policy from 1979 to 1998 quite well. This result is robust to the use of real-time or ex post data and to the consideration of serially correlated errors. The main lesson is that, in addition to anchoring long-term inflation expectations, monetary targeting introduces inertia and history-dependence into the monetary policy rule. This is advantageous when private agents have forward-looking expectations and when the level of the output gap is subject to persistent measurement errors.

The US Federal Reserve cut interest rates more vigorously in the recent recession than the European Central Bank did. By comparison with the Fed, the ECB followed a more measured course of action. We use an estimated dynamic general equilibrium model with financial frictions to show that comparisons based on such simple metrics as the variance of policy rates are misleading. We find that - because there is greater inertia in the ECB’s policy rule - the ECB’s policy actions actually had a greater stabilizing effect than did those of the Fed. As a consequence, a potentially severe recession turned out to be only a slowdown, and inflation never departed from levels consistent with the ECB’s quantitative definition of price stability. Other factors that account for the different economic outcomes in the Euro Area and US include differences in shocks and differences in the degree of wage and price flexibility.

In a sticky-price model with labor market search and habit persistence, Walsh (2005) shows that inertia in the interest rate policy helps to reconcile the inflation and output persistence with empirical observations for the US economy. We show that this finding is sensitive with regard to the introduction of capital formation. While we are able to replicate the findings for the inflation inertia in a model with capital adjustment costs and variable capacity utilization, the output response to an interest shock is found to be too large and no longer hump-shaped in this case. In addition we find that the response of output to a technology shock can only be reconciled with empirical findings if either the adjustment of the utilization rate is very costly or there is only a modest amount of nominal rigidity in the economy.

In this paper we employ a time series econometric framework to explore the structural determinants of the spread between the euro overnight rate and the ECB?s policy rate (EONIA spread) aiming to explain the widening of the EONIA spread in the period from mid-2004 to mid-2006. We mainly estimate a model of the EONIA spread from March 2004 until August 2006. The analysis identifies possible driving forces underlying the evolution of the spread over time and aims to quantify the impact of specific factors on the observed upward shift. We show that the increase in the EONIA spread can for the largest part be explained by the current liquidity deficit. Moreover, tight liquidity conditions as well as an increase in banks? uncertainty about the liquidity conditions lead to a significant upward pressure on the spread. ECB?s liquidity policy only has a significant impact on the reduction of the spread if a loose policy is conducted during the last week of an MRO. Interestingly, interest rate expectations have not been found to have an important influence.

This paper presents a systematic empirical relationship between money and subsequent prices and output, using US, euro area and Swiss data since the 1960-70s. Monetary developments, unlike interest rate stance measures, are shown to provide qualitative and quantitative information on subsequent inflation. The usefulness of monetary analysis is contrasted to weaknesses in modeling monetary policy and inflation with respectively short-term interest rates and real activity measures. The analysis sheds light on the recent change in inflation volatility and persistence as well as on the Phillips curve flattening, and reveals drawbacks in pursuing a low inflation target without considering monetary aggregates.

The paper analyses the performance of simple interest rate rules which feature a response to noisy observations of inflation, output and money growth. The analysis is based on a small empirical model of the hybrid New Keynesian type which has been estimated on euro area data by Stracca (2007). To assess the magnitude of the measurement problems regarding the feedback variables, we draw upon the real-time data set for Germany compiled by Gerberding et al. (2004). We find that interest rate rules which include a response to money growth outperform both Taylor-type rules and speed limit policies once real-time output gap uncertainty is accounted for. One reason is that targeting money growth introduces history dependence into the policy rule which is desirable when private agents are forward-looking. The second reason is that money growth contains information on the "true" growth rate of output which can only be measured imperfectly.

We examine an interesting puzzle in monetary economics between what monetary authorities claim (namely to be forward-looking and pre-emptive) and the poor stabilization properties routinely reported for forecast-based rules. Our resolution is that central banks should be viewed as following ‘Calvo-type’ inflation-forecast-based (IFB) interest rate rules which depend on a discounted sum of current and future rates of inflation. Such rules might be regarded as both within the legal frameworks, and potentially mimicking central bankers’ practice. We find that Calvo-type IFB interest rate rules are first: less prone to indeterminacy than standard rules with a finite forward horizon. Second, for such rules in difference form, the indeterminacy problem disappears altogether. Third, optimized forms have good stabilization properties as they become more forward-looking, a property that sharply contrasts that of standard IFB rules. Fourth, they appear data coherent when incorporated into a well-known estimated DSGE model of the Euro-area.

So far studies concerned with the interest pass-through of monetary policy have not taken into account one central issue that arose in Europe in the late 1990s: the importance of financial structure for the convergence of monetary transmission. This study addresses this shortcoming. We estimate a time varying interest pass-through allowing us to test for the importance of financial structure and its impact on the convergence of the effects of monetary policy. We find convergence in banks' reaction to money market movements, which is additionally reduced in groups of countries with similar financial structure. Furthermore, there is a significant impact of financial structure on the extent of transmission of monetary policy impulses within the same month. Thus, differences in financial structure between countries must not be ignored when considering convergence of monetary transmission in Europe.