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Appears in Collections:Economics Working Papers
Peer Review Status: Refereed
Title: An Empirical Assessment of Optimal Monetary Policy Delegation in the Euro Area
Author(s): Chen, Xiaoshan
Kirsanova, Tatiana
Leith, Campbell
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Citation: Chen X, Kirsanova T & Leith C (2014) An Empirical Assessment of Optimal Monetary Policy Delegation in the Euro Area. Stirling Economics Discussion Paper, 2014-11.
Keywords: Bayesian Estimation
Interest Rate Rules
Optimal Monetary Policy
Great Moderation
Zero Lower Bound
Financial Crisis
Great Recession
JEL Code(s): E58: Central Banks and Their Policies
E32: Business Fluctuations; Cycles
C11: Bayesian Analysis: General
C51: Model Construction and Estimation
C52: Model Evaluation, Validation, and Selection
C54: Quantitative Policy Modeling
Issue Date: 30-Nov-2014
Date Deposited: 19-Nov-2014
Series/Report no.: Stirling Economics Discussion Paper, 2014-11
Abstract: We estimate a New Keynesian DSGE model for the Euro area under alternative descriptions of monetary policy (discretion, commitment or a simple rule) after allowing for Markov switching in policy maker preferences and shock volatilities. This reveals that there have been several changes in Euro area policy making, with a strengthening of the anti-inflation stance in the early years of the ERM, which was then lost around the time of German reunification and only recovered following the turnoil in the ERM in 1992. The ECB does not appear to have been as conservative as aggregate Euro-area policy was under Bundesbank leadership, and its response to the financial crisis has been muted. The estimates also suggest that the most appropriate description of policy is that of discretion, with no evidence of commitment in the Euro-area. As a result although both ‘good luck' and ‘good policy' played a role in the moderation of inflation and output volatility in the Euro-area, the welfare gains would have been substantially higher had policy makers been able to commit. We consider a range of delegation schemes as devices to improve upon the discretionary outcome, and conclude that price level targeting would have achieved welfare levels close to those attained under commitment, even after accounting for the existence of the Zero Lower Bound on nominal interest rates.
Type: Working Paper
Affiliation: Economics
University of Glasgow
University of Glasgow

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