Which interest rate rule does the ECB apply? (FAZ)

Interest rate rules such as the so-called Taylor rule can give central bank an orientation for their monetary policy. Recently, the European Central Bank (ECB) has referred to the interest rate rule by the economist and IMFS Research Fellow Athanasios Orphanides. In Volker Wieland's opinion, however, the ECB has not been consistent in applying this rule as he explained in an interview with "Frankfurter Allgemeine Zeitung".

According to the Orphanides rule, a central bank should raise interest rates if the expected interest rate development is above the target and growth forecast is above potential growth. In joint research, Orphanides and Wieland applied this interest rate rule to the euro area.

In Wieland's opinion, however, the interest rate rule can only explain the ECB's monetary policy until 2014. Since then, the ECB has been deviating downwards, Wieland argues, referring to the quantitative easing (QE). In his view, the ECB's monetary policy has been too expansionary. He also suggested applying the Taylor rule, which could have been helpful for the ECB. The best-known interest rate rule goes back to John B. Taylor who described the monetary policy of the Federal Reserve between 1988 and 1993 with this rule. "The Taylor rule has sent a clear signal that something was wrong", Wieland said.

FAZ: Welcher Zinsregel folgt die EZB?

Orphanides, Athanasios and Volker Wieland (2013): Complexity and Monetary Policy,International Journal of Central Banking, vol. 9, pp. 167-203 (PDF)