This document compares the monetary policy of the Federal Reserve and ECB using a Taylor Rule analysis. It aims to determine if central banks accurately follow interest rate rules and consistently achieve their goals of maximum employment and price stability. The study estimates reaction functions for both central banks using quarterly data sets for interest rates, inflation, and output gaps. It finds that a Taylor Rule describes the Federal Reserve's interest rate management relatively well but fits the ECB's data less accurately, possibly because their sole mandate is price stability rather than multiple goals.

1. THE MONETARY POLICY OF FED AND ECB. A COMPARATIVE STUDY THROUGH TAYLOR RULE.Iannace InnocenzoLanzillo Giorgio 1

2. “Discretion versus policy rules in pratice” J.B. Taylor, 1993 The ruleproposeddescribedsurprisinglywell the trend ofFederalFunds – Rate over the period 1987 - 1993 2

3. The Taylor rule is a linear function, in which the interest rate is the dependent variable, while the inflation gap and output gap are the regressors 3

4. TAYLOR RULE 4

5. RESEARCH AIMS: Does Taylor Ruledescribeaccurately the interest rate management? Are centralbankersconsistentachieving the centralbanksconstitutiongoals? 5

6. 6 Does Taylor Ruledescribeaccurately the interest rate management?

7. FEDERAL FUNDS RATE 7

8. - Kydland e Prescott “Rules Rather than Discretion – The Inconsistency of Optimal Plans”- 1977 - Consistency, credibility, private sector involvement 8

9. - Timeinconstintency- Needof accurate rules 9

10. Taylor ruleweaknesses - Extreme sensitivity of T.R. - Real-time availability of accurate data that reflect the real state of the economy- Real time measurement of output gap is considered difficult (Orphanides, 1999) 10

11. EMPIRICAL ANALYSISEstimationofreactionfunction 11

12. 12 Are centralbankersconsistentachieving the centralbanksconstitutiongoals?

14. ECB: […] “The primaryobjectiveof the European System ofCentralBanksshallbetomantain price stability […]”13

15. Taylor rule 14

16. FEDERAL RESERVE BANK DATA SET Quarterly data 1980 – 2008 Interest rate data: Dallas Fed statisticalwarehouse Inflation and deflated GDP data: OECD statisticalwarehouse 15

17. 16

18. Coefficientsestimation 17

19. Actual, fitted, residualobservations 18

21. GDP: ECB statisticalarchives

22. Interest rate and inflation rate: OECD statisticalwarehouse19

23. 20

24. Coefficientsestimation 21

25. Actual, fitted, residualobservations 22

26. OUTCOMES 23