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Interest Rate Setting by the ECB, 1999-2006: Words and Deeds

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  • Stefan Gerlach

    (Institute for Monetary and Financial Stability, Johann Wolfgang Goethe University, Frankfurt am Main)

Abstract

We estimate empirical reaction functions for the European Central Bank (ECB) with ordered-probit techniques, using the ECB's Monthly Bulletin to guide the choice of variables. The results show that policy reacts to the state of the real economy, M3 growth, and exchange rate changes but not to inflation. We develop quantitative indicators of the Governing Council's assessment of economic conditions to understand its interest rate decisions and argue that the ECB has not reacted to inflation shocks because they were seen as temporary. By contrast, policy responses to economic activity are strong because it impacts on the outlook for inflation.

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Bibliographic Info

Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 3 (2007)
Issue (Month): 3 (September)
Pages: 1-46

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Handle: RePEc:ijc:ijcjou:y:2007:q:3:a:1

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  1. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
  2. Eichengreen, Barry & Watson, Mark W & Grossman, Richard S, 1985. "Bank Rate Policy under the Interwar Gold Standard: A Dynamic Probit Model," Economic Journal, Royal Economic Society, vol. 95(379), pages 725-45, September.
  3. Gourieroux, C. & Monfort, A. & Trognon, A., 1985. "A General Approach to Serial Correlation," Econometric Theory, Cambridge University Press, vol. 1(03), pages 315-340, December.
  4. Ehrmann, Michael & Fratzscher, Marcel, 2005. "Communication and decision-making by central bank committees: different strategies, same effectiveness?," Working Paper Series 0488, European Central Bank.
  5. Carlo Rosa & Giovanni Verga, 2005. "Is ECB Communication Effective?," CEP Discussion Papers dp0682, Centre for Economic Performance, LSE.
  6. Gourieroux Christian & Monfort Alain & Trognon A, 1984. "General approach of serial correlation (a)," CEPREMAP Working Papers (Couverture Orange) 8424, CEPREMAP.
  7. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
  8. Helge Berger & Jan-Egbert Sturm, 2006. "Does Money Matter in the ECB Strategy? New Evidence Based on ECB Communication," CESifo Working Paper Series 1652, CESifo Group Munich.
  9. Carstensen, Kai, 2006. "Estimating the ECB policy reaction function," Munich Reprints in Economics 19941, University of Munich, Department of Economics.
  10. Marie Musard-Gies, 2006. "Do European Central Bank'S Statements Steer Interest Rates In The Euro Zone?," Manchester School, University of Manchester, vol. 74(s1), pages 116-139, 09.
  11. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  12. Gerlach, Stefan, 2004. "Interest Rate Setting by the ECB: Words and Deeds," CEPR Discussion Papers 4775, C.E.P.R. Discussion Papers.
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