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De Facto Index of Monetary Policy Domestic Activism and Inefficient Trilemma Configurations in Oecd Countries
Author(s) -
Wu Thomas
Publication year - 2015
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1502
Subject(s) - trilemma , economics , de facto , monetary policy , monetary economics , index (typography) , volatility (finance) , inflation (cosmology) , inflation targeting , macroeconomics , international economics , financial economics , physics , world wide web , political science , law , computer science , theoretical physics
This paper presents a measure of de facto monetary policy commitment towards domestic objectives—namely, price and output stability—based on how well Taylor rules fit interest rate data for Organisation for Economic Co‐operation and Development (OECD) economies between 2002 and 2009. The resulting index reveals that although 17 of the 18 autonomous central banks analysed state price stability as their de jure primary objective, the observed de facto behaviour is quite different. Higher de facto monetary policy domestic activism seems to be correlated with lower real gross domestic product growth volatility and lower average consumer price index inflation from a cross‐sectional perspective and lower levels of financial stress from a time‐series perspective. Moreover, there is evidence that inefficient trilemma configurations—in which further improvements along more than one policy dimension should be simultaneously achievable—are more likely to be observed in less developed OECD economies with higher degrees of stress in their financial system. Copyright © 2014 John Wiley & Sons, Ltd.