Title: Implicit Taylor reaction functions for Euro area countries
Author: Jens Klose
Address: University of Duisburg-Essen, Universitätsstr. 12, D-45117 Essen, Germany
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.
Keywords: Taylor reaction functions; ECB; European Central Bank; asymmetries; optimal currency area; interest rates; Euro area; Eurozone; sovereign debt crisis.
Int. J. of Monetary Economics and Finance, 2012 Vol.5, No.2, pp.153 - 168
Available online: 24 Aug 2012