How did the main central banks react to the crisis? Evidence from the reaction functions

• Thesis title in Czech: Jak reagovaly hlavní centrální banky na Velkou recesi? Evidence z reakčních funkcí
• Thesis title in English: How did the main central banks react to the crisis? Evidence from the reaction functions
• Key words: Taylorova reakční funkce, Velká recese, Časová řada
• English key words: Taylor reaction function, Great Recession, Time-series data
• Academic year of topic announcement: 2018/2019
• Thesis type: Bachelor's thesis
• Thesis language: angličtina
• Department: Institute of Economic Studies (23-IES)
• Supervisor: PhDr. Jaromír Baxa, Ph.D.
• Author: hidden - assigned by the advisor
• Date of registration: 10.05.2019
• Date of assignment: 10.05.2019
• Date and time of defence: 09.06.2020 09:00
• Date of electronic submission: 06.05.2020
• Date of proceeded defence: 09.06.2020
• Opponents: Mgr. Dominika Ehrenbergerová

Guidelines

Research question and motivation

As the financial crises raised new challenges for central banks in the decision making in order to maintain financial stability (Baxa, 2013), our aim is to see how the world largest banks have reacted to the Great Recession and after that and what were the differences between their reactions. The main focus of this Bachelor thesis would be on the differences between the Taylor reaction functions of the European Central Bank and the Federal Reserve System. We are interested as well as in the divergence of the reaction after the crises, as the politics of the European Central Bank is occasionally considered to be too careful (Bibow, 2016). The other research question related to this issue is if the interest rates in the European Union would be the same if the European Central Bank would use the same reaction function as the Federal Reserve System. The monetary policy decisions of the central banks are made on real-time information that can be incomplete and sometimes misleading (Gerdesmeier, 2004), therefore our last research question is how the results would distinguish when we use real-time data instead of ex-post data for our model.

Contribution
The existing literature is mainly focused on the time before and of the crises, but as the time past from the Great Recession nowadays there are available data for the period after the crises and we believe that there can be interesting statistics as well. Combination of the data from the longer period would give us a complete comparison of the behavior of the individual central banks based on the Taylor reaction function. The analysis of the monetary politics is often made on ex-post data (this method is regarded as useful by empirical literature), but we want to run the regression using real-time data as well to see how the bank reacted to the data they had in the time of making the decisions - to obtain a clue on what was the reaction of the banks based on and what they aimed to do depend on available information. This thesis could, therefore, offer another point of view on the monetary politics of the central banks
and their adequacy.

References

1. ROMER, David. Advanced Macroeconomics. Second edition. United States of America: McGraw-Hill, 1996. ISBN 0-07-053667-8.
2. WALSH, Carl E. Monetary Theory and Policy. Third edition. Massachusetts: The Massachusetts Institute of Technology Press, 2010. ISBN 978-0-262-01377-2.
3. GERDESMEIER, Dieter and Barbara ROFFIA. Taylor rules for the euro area: the issue of real-time data [online]. Deutsche Bundesbank, 2004, 44 [cit. 2019-05-03]. DOI: 3-86558-031-9. Available from: https://ideas.repec.org/p/zbw/bubdp1/2915.html
4. BAXA, Jaromír, Roman HORVÁTH and Bořík VAŠÍČEK. Time-varying monetary-policy rules and financial stress: Does financial instability matter for monetary policy?. Journal of Financial Stability [online]. 2013, (9), 117-138 [cit. 2019-05-03]. Dostupné z: http://library.utia.cas.cz/separaty/2013/E/baxa-0395375.pdf
5. BIBOW, Jörg. From antigrowth bias to quantitative easing: The ECB's belated conversation? [online]. NY: Levy Economics Institute of Bard College, 2016, 37 [cit. 2019-05-03]. Available from: https://www.econstor.eu/bitstream/10419/173477/1/wp_868.pdf
6. ULLRICH, Katrin. A Comparison between the Fed and ECB: Taylor rules. [online]. Zentrum für Europäische Wirtschaftsforschung GmbH, 2003, 35[cit. 2019-05-03]. Available from:  https://ssrn.com/abstract=428482

Preliminary scope of work

Methodology

The main methodology we will use is the Taylor reaction function modified to enabling negative interest rates. We will run the regression for all five countries first for ex-post data and then we will focus on estimating it for real-time data as well. After that, we will have a possibility to see if and how they differ from each bank, for using ex-post and real-time data and how they differ from the existing estimates. The needed data (for example GDP or CPI indexes) for Fed, ECB, PBOC, BOJ, and BOE are available mainly in the OECD data library, or in the World Bank dataset. The data will be analysed for years 1998-2018.

Outline
1. Introduction
2. Literature review (Taylor rule, Real-time data analysis,…)
3. Data and methodology
4. Results
5. Conclusion and suggestion for further research

Preliminary scope of work in English

Research question and motivation
As the financial crises raised new challenges for central banks in the decision making in order to maintain financial stability (Baxa, 2013), our aim is to see how the world largest banks have reacted to the Great Recession and after that and what were the differences between their reactions. The main focus of this Bachelor thesis would be on the differences between the Taylor reaction functions of the European Central Bank and the Federal Reserve System. We are interested as well as in the divergence of the reaction after the crises, as the politics of the European Central Bank is occasionally considered to be too careful (Bibow, 2016). The other research question related to this issue is if the interest rates in the European Union would be the same if the European Central Bank would use the same reaction function as the Federal Reserve System. The monetary policy decisions of the central banks are made on real-time information that can be incomplete and sometimes misleading (Gerdesmeier, 2004), therefore our last research question is how the results would distinguish when we use real-time data instead of ex-post data for our model.

Contribution
The existing literature is mainly focused on the time before and of the crises (the paper written by Katrin Ulrich uses data from 1999 till 2002), but as the time past from the Great Recession nowadays there are available data for the period after the crises and we believe that there can be interesting statistics as well. A combination of the data from a longer period would give us a complete comparison of the behaviour of the individual central banks based on the Taylor reaction function.

The analysis of the monetary politics is often made on ex-post data (this method is regarded as useful by empirical literature), but we want to run the regression using real-time data as well to see how the bank reacted to the data they had in the time of making the decisions - to obtain a clue on what was the reaction of the banks based on and what they aimed to do depend on available information. This thesis could, therefore, offer another point of view on the monetary politics of the central banks and their adequacy.