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   March, 2001

Facultad de Economia, 46022 Valencia, Spain   

  Some New Results on Interest Rate Rules in EMU and in the US

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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