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. |
| Consultants: | |
| Work type: | Bachelors |
| Language: | English |
| Pages: | 58 |
| Awards and prizes: | |
| Link: | https://is.cuni.cz/webapps/zzp/detail/213590/ |
| 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. |
