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Title:Threshold effects in the monetary policy reaction function of the Deutsche Bundesbank PDF Logo
Authors:Mandler, Martin
Issue Date:2011
Series/Report no.:Joint discussion paper series in economics 29-2011
Abstract:We estimate monetary policy reaction functions with threshold effects for the Deutsche Bundesbank using a real-time data set. Estimates based on the deviation of inflation from the Bundesbank's inflation target as threshold variable suggest a switch to a stronger output gap response in the reaction function if past inflation was high. The reaction function in the regime with higher inflation implies an overall less contractionary monetary policy than that for the low inflation regime. A modified model with three regimes shows this result to be related to periods of substantial excess inflation. We explore a threshold reaction function with a moving inflation target that captures a gradual adjustment of an intermediate to a long-term inflation target and find the Bundesbank to follow a more restrictive monetary policy stance if inflation is above the intermediate-term inflation target.
Subjects:monetary policy reaction function
threshold regression
instrumental variables
real-time data
JEL:E52
E58
C24
C26
Document Type:Working Paper
Appears in Collections:MAGKS Joint Discussion Paper Series in Economics, Universität Marburg

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