Rafael Domenech, Mayte Ledo and David Taguas.
This paper offers two new results on interest rate rules.
First, we show that the empirical evidence from 1970 onwards for the US is compatible with
a Taylor rule when we consider the possibility of changes in the inflation target and in
the real interest rate. Second, recursive estimates of a forward-looking version of the
Taylor rule for EMU confirm an increasing weight for inflation in the area, possibly as a
consequence of the EMS, and, furthermore, a convergence in the nineties to the German
value observed for the whole period. This process has coincided with an important
reduction in the deviation of inflation across EMU countries. The results also show that
credibility problems have coincided with periods of higher real interest rate in the euro
zone, which cannot be explained using the interest rule.
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