Type of Publication: Article in Journal

Asymmetric Taylor Reaction Functions of the ECB: An Approach Depending on the State of the Economy

Author(s):

Klose, J.

Title of Journal:

North American Journal of Economics and Finance

Volume (Publication Date):

22 (2011)

Number of Issue:

2

pages:

149-163

Digital Object Identifier (DOI):

doi:10.1016/j.najef.2011.01.002

Citation:

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Abstract

We introduce a new approach to estimate asymmetric Taylor reaction functions where asymmetries depend crucially on the state of the economy which is in the Taylor rule framework the combination of inflation and output deviations. Thus we categorize the sample into four subsamples which correspond to all possible combinations concerning inflation and output deviations. Moreover we introduce a quadratic  term of inflation and the output gap in the estimation equation for each state in order to capture possible nonlinearities within each state. The approach is tested using data for the ECB because the ECB has communicated an explicit inflation target.