Interest-rate setting and communication at the ECB in its first twenty years

To examine the role of ECB communication at press conferences, we estimate non-linear empirical reaction functions for the ECB's monetary policy decisions during the first two decades of monetary union and augment them with communication indicators on the risks to price stability and to growth. Overall, we find that the ECB's risk assessments at press conferences provided reliable orientation to observers concerning future policy decisions. Communication about the risks to inflation and to growth was more relevant for explaining future policy changes than the staff projections themselves. We also show that the ECB responded to risks to price stability in line with its primary objective and that its reaction function evolved after the global financial crisis, when money (or credit) growth lost its significance as a driver of the policy response. Our findings add to the understanding of the ECB's reaction function and the role of communication therein.