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Out of the ELB: expected ECB policy rates and the Taylor rule

Author

Listed:
  • Marco Bernardini

    (Bank of Italy)

  • Alessandro Lin

    (Bank of Italy)

Abstract

We compare the path of the ECB policy rate (deposit facility rate) expected by financial market analysts with simple monetary policy rules based on their own expectations regarding inflation and the economic activity. To this end, we adopt a thick-modelling approach to account for uncertainty surrounding the exact parametrization of the rule according to analysts. We show that, since the ECB monetary policy moved away from the effective lower bound (ELB) and stopped providing explicit forward guidance on the future path of the policy rate, policy rate expectations have become largely aligned with those implied by the rules. We also document three additional findings. First, growing perceptions of downward demand-side risks since spring 2023 have been associated with an adjustment of analysts’ rate expectations to slightly-below rule-implied rates. Second, the significant and continuous upward revisions of expected ECB rates observed during the 2022-23 rate hiking cycle have mainly resulted from upward revisions of expected inflation and expectations of a higher long-run policy rate. Third, analysts’ rate expectations appear to be shaped more by expectations regarding core inflation rather than those of headline inflation.

Suggested Citation

  • Marco Bernardini & Alessandro Lin, 2023. "Out of the ELB: expected ECB policy rates and the Taylor rule," Questioni di Economia e Finanza (Occasional Papers) 815, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_815_23
    as

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    References listed on IDEAS

    as
    1. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14, National Bureau of Economic Research, Inc.
    2. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348, National Bureau of Economic Research, Inc.
    3. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, March.
    4. Brand, Claus & Hutchinson, John, 2022. "The ECB survey of Monetary Analysts: an introduction," Economic Bulletin Articles, European Central Bank, vol. 8.
    5. Michael Woodford, 2003. "Optimal Interest-Rate Smoothing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(4), pages 861-886.
    6. Orphanides, Athanasios, 2003. "Historical monetary policy analysis and the Taylor rule," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 983-1022, July.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Margherita Bottero & Antonio M. Conti, 2023. "In the thick of it: an interim assessment of monetary policy transmission to credit conditions," Questioni di Economia e Finanza (Occasional Papers) 810, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    monetary policy rules; expectations; ECB's survey of monetary analysts; effective lower bound.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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