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Verifying time inconsistency of the ECB monetary policy by means of a regime-switching approach

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  • Andrea Beccarini

    (University of Münster)

Abstract

The aim of this work is to verify whether there is an inflation bias in the Euro-area monetary policy. I verify the presence of a strategic repeated game between the European Central Bank and the market, in setting actual and expected inflation, and consider the features of this game. In particular, the aim is to verify whether the market fixes the expected inflation strategically, and how the probability of the kind of monetary policy is formed. It can be concluded that the market behaves strategically, but an inflation bias does not emerge from data. The source of non-credibility cannot be the bank’s lack of commitment, but it may be a partial inability to control or to communicate economic shocks. These conclusions are robust to two different estimation strategies, which are both based on regime-switching regressions. The effects of the recent financial and sovereign-debt crises are taken into account.

Suggested Citation

  • Andrea Beccarini, 2017. "Verifying time inconsistency of the ECB monetary policy by means of a regime-switching approach," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 44(2), pages 203-227, May.
    • Handle: RePEc:kap:empiri:v:44:y:2017:i:2:d:10.1007_s10663-016-9316-8
    DOI: 10.1007/s10663-016-9316-8
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    More about this item

    Keywords

    Time inconsistency of monetary policy; Repeated game; Markov-switching model;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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