Are Public Preferences Reflected in Monetary Policy Reaction Functions?

In this paper, we test whether public preferences for price stability (obtained from the Eurobarometer survey) are actually reflected in the interest rates set by eight central banks. We estimate augmented Taylor (1993) rules for the period 1976–1993 using the dynamic GMM estimator. We find, first,...

Full description

Saved in:
Bibliographic Details
Published in:MAGKS - Joint Discussion Paper Series in Economics (Band 21-2013)
Main Author: Neuenkirch, Matthias
Format: Article
Language:English
Published: Philipps-Universität Marburg 2013
Subjects:
Online Access:PDF Full Text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:In this paper, we test whether public preferences for price stability (obtained from the Eurobarometer survey) are actually reflected in the interest rates set by eight central banks. We estimate augmented Taylor (1993) rules for the period 1976–1993 using the dynamic GMM estimator. We find, first, that interest rates do reflect society’s preferences since the central banks raise rates when society’s inflation aversion is above its long‐run trend. Second, the reaction to inflation is non‐linearly increasing in the degree of inflation aversion. Third, this emphasis on fighting inflation does not have a detrimental effect on output stabilization. We conclude with some implications concerning the democratic legitimation of central banks.
ISSN:1867-3678
DOI:10.17192/es2024.0184