Monetary policy rules and the information content of the term structure of interest rates

Abstract

The study incorporates information on the term structure of interest rates into empirical reaction functions for the Bundesbank and the European Central Bank. The results suggest that the term structure played a statistically significant role for the monetary policy of both central banks.

Notes

¹ In order to avoid starting point and end point problems, the trend over an extended period is computed covering 1970 through 2003 for the German output gap. For the European trend the study did not extent the period under consideration. A HP filter was also used in both cases and the reported results were robust against this change.

² Heteroscedasticity was corrected for and autocorrelation of unknown form. In addition, Bartlett weights were chosen to ensure positive definiteness of the estimated variance-covariance matrix.

³ More specifically, the study used the first six, the ninth and the twelfth lag of the output gap, inflation gap and the IMF commodity price index as well as the first, sixth, ninth and twelfth lag of the short term interest rate. This is close to the instruments suggested by Clarida et al. (1998). For the ECB reaction function the IMF commodity price index was left out because J-tests rejected it as a valid instrument.

⁴ German yield curve data were relied on also for the ECB reaction function because the German yield curve is interpreted as a reasonable approximation for the Euro area yield curve. The estimates of the German yield curve are based on the parameters of the Svensson (1994) smoothing technique as made available by the Bundesbank.