MONETARY-POLICY RULES IN PRACTICE - SOME INTERNATIONAL EVIDENCE

This paper reports estimates of monetary policy reaction functions for two sets of countries: the G3 (Germany, Japan, and the US) and the E3 (UK, France, and Italy). We find that since 1979 each of the G3 centr al banks has pursued an implicit form of inflation targeting, which ma y account for the broad success of monetary policy in those countries over this time period. The evidence also suggests that these central b anks have been forward looking: they respond to anticipated inflation as opposed to lagged inflation. As for the E3, even prior to the emerg ence of the 'hard ERM', the E3 central banks were heavily influenced b y German monetary policy. Further, using the Bundesbank's policy rule as a benchmark, we find that at the time of the EMS collapse, interest rates in each of the E3 countries were much higher than domestic macr oeconomic conditions warranted. Taken all together, the results lend s upport to the view that some form of inflation targeting may be superi or to fixing exchange rates, as a means to gain a nominal anchor for m onetary policy. (C) 1998 Published by Elsevier Science B.V. All rights reserved.