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Belke, Ansgar
Klose, Jens
Year of Publication: 
Series/Report no.: 
Ruhr Economic Papers 343
We propose an alternative way of estimating Taylor reaction functions if the zero-lower-bound on nominal interest rates is binding. This approach relies on tackling the real rather than the nominal interest rate. So if the nominal rate is (close to) zero central banks can influence the inflation expectations via quantitative easing. The unobservable inflation expectations are estimated with a state-space model that additionally generates a time-varying series for the equilibrium real interest rate and the potential output - both needed for estimations of Taylor reaction functions. We test our approach for the ECB and the Fed within the recent crisis. We add other explanatory variables to this modified Taylor reaction function and show that there are substantial differences between the estimated reaction coefficients in the pre- and crisis era for both central banks. While the central banks on both sides of the Atlantic act less inertially, put a smaller weight on the inflation gap, money growth and the risk spread, the response to asset price inflation becomes more pronounced during the crisis. However, the central banks diverge in their response to the output gap and credit growth.
Abstract (Translated): 
Das Papier stellt einen alternativen Weg zur Schätzung von Taylor-Reaktionsfunktionen dar, wenn die Nullzinsgrenze bindend geworden ist, indem der Real- anstatt der Nominalzins als abhängige Variable definiert wird. Die Beeinflussung des Realzinses durch die Zentralbank erfolgt über die quantitative Lockerung und deren Wirkung auf die Inflationserwartungen. Durch die Einbeziehung zusätzlicher Variablen in diese modifizierte Taylor-Reaktionsfunktion testen wir für die EZB und die Fed, ob sich die Reaktion zu wichtigen real- und finanzwirtschaftlichen Variablen in der globalen Finanzkrise verändert hat.
Federal Reserve
European Central Bank
equilibrium real interest rate
Taylor rule
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Working Paper

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