How did the main central banks react to the crisis? Evidence from the reaction functions
|Author:||Bc. Barbara Livorová|
|Year:||2020 - summer|
|Leaders:|| PhDr. Jaromír Baxa Ph.D.
|Work type:|| Bachelors
|Awards and prizes:|
|Abstract:||Monetary policy of the central banks has been mainly conducted via setting
the short-term interest rate, and even after the Great Recession, the shadow
interest rate has been used as an indicator of the monetary policy stance.
This study uses the Taylor reaction function to investigate the response of the
European Central Bank and the Federal reserve to the Great Recession. Our
results show that between 2004 and 2015, the ECB and the Fed had been
following a forward-looking Taylor rule. Estimating the models based on
ex-post and real-time data, we evaluate the differences between the results for
the ECB and the Fed as well as the differences depending on the type of data
used. The results show that the banks give different importance to various
variables influencing policy rate setting. In the long term, the Fed is more
concerned about the changes in the economic activity variables than the ECB.
Applying rolling estimation, we examine the stability of the coefficients within
the sample period. Finally, we investigate how would the rates look like if the
ECB followed an interest-rate-setting policy that would react more aggressively
to the changes in the economic indicators, similar to the interest-rate-setting
policy followed by the Fed.