Implicit Taylor reaction functions for Euro area countries
by Jens Klose
International Journal of Monetary Economics and Finance (IJMEF), Vol. 5, No. 2, 2012

Abstract: This study estimates modified Taylor reaction functions which tackle the real rather than the nominal interest rates for the Euro area as a whole, and separately for the individual member states, before the onset of the current sovereign debt crisis. We show there are significant differences between Taylor reaction functions in the Euro area countries, which cast doubts on the Euro area being an optimal currency area. The results are used to carry out out-of-sample forecasts for the sovereign debt crisis period which show that the ECB has held the interest rate low for most of the countries during the crisis.

Online publication date: Tue, 28-Aug-2012

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