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The Zero Lower Bound, ECB Interest Rate Policy and the Financial Crisis

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  • Gerlach, Stefan
  • Lewis, John

Abstract

This paper estimates a monetary policy reaction function for the ECB over the period 1999-2009. To allow for a potential shift in interest rate setting during the financial crisis, we permit a smooth transition from one set of parameters to another. The estimates show a swift change in the months following the collapse of Lehman brothers. They suggest that the ECB cut rates more aggressively than expected solely on the basis of the worsening of macroeconomic conditions, consistent with the theoretical literature on optimal monetary policy in the vicinity of the zero bound.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7933.

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Date of creation: Jul 2010
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Handle: RePEc:cpr:ceprdp:7933

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Keywords: ECB; Reaction function; Smooth transition; Zero lower bound;

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References

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  1. Coenen, Günter & Wieland, Volker, 2004. "Exchange-rate policy and the zero bound on nominal interest rates," Working Paper Series, European Central Bank 0350, European Central Bank.
  2. Svensson, Lars E O, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1511, C.E.P.R. Discussion Papers.
  3. Klaus Adam & Roberto M. Billi, 2005. "Optimal monetary policy under commitment with a zero bound on nominal interest rates," Research Working Paper, Federal Reserve Bank of Kansas City RWP 05-07, Federal Reserve Bank of Kansas City.
  4. Coenen, Günter & Levin, Andrew & Wieland, Volker, 2003. "Data Uncertainty and the Role of Money as an Information Variable for Monetary Policy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3812, C.E.P.R. Discussion Papers.
  5. Coenen, Günter & Orphanides, Athanasios & Wieland, Volker, 2003. "Price stability and monetary policy effectiveness when nominal interest rates are bounded at zero," Working Paper Series, European Central Bank 0231, European Central Bank.
  6. Gerlach, Stefan & Schnabel, Gert, 1999. "The Taylor Rule and Interest Rates in the EMU Area," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2271, C.E.P.R. Discussion Papers.
  7. Mankiw, N Gregory & Miron, Jeffrey A & Weil, David N, 1987. "The Adjustment of Expectations to a Change in Regime: A Study of the Founding of the Federal Reserve," American Economic Review, American Economic Association, vol. 77(3), pages 358-74, June.
  8. Gerlach-Kristen, Petra, 2003. "Interest rate reaction functions and the Taylor rule in the euro area," Working Paper Series, European Central Bank 0258, European Central Bank.
  9. Assenmacher-Wesche, Katrin, 2006. "Estimating Central Banks' preferences from a time-varying empirical reaction function," European Economic Review, Elsevier, vol. 50(8), pages 1951-1974, November.
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Citations

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Cited by:
  1. Merola, Rossana, 2014. "The role of financial frictions during the crisis: an estimated DSGE model," Dynare Working Papers 33, CEPREMAP.
  2. Ebru Yuksel & Kývýlcým Metin Ozcan & Ozan Hatipoglu, 2012. "A Survey on Time Varying Parameter Taylor Rule: A Model Modified with Interest Rate Pass Through," Working Papers 2012/08, Bogazici University, Department of Economics.
  3. Roland Döhrn & Tobias Kitlinski & Martin Micheli & Torsten Schmidt & Simeon Vosen & György Barabas & Heinz Gebhardt & Lina Zimmermann, 2010. "Die wirtschaftliche Entwicklung im Inland zur Jahresmitte 2010 - Aufschwung verliert an Fahrt," RWI Konjunkturbericht, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, pages 46, 09.
  4. Nikolay Markov & Thomas Nitschka, 2013. "Estimating Taylor Rules for Switzerland: Evidence from 2000 to 2012," Working Papers 2013-08, Swiss National Bank.
  5. Gerlach, Stefan & Lewis, John, 2011. "ECB Reaction Functions and the Crisis of 2008," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8472, C.E.P.R. Discussion Papers.
  6. Aastrup, Morten & Jensen, Henrik, 2010. "What Drives the European Central Bank's Interest-Rate Changes?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8160, C.E.P.R. Discussion Papers.
  7. Rossana Merola, 2013. "The role of financial frictions in the 2007-2008 crisis: an estimated DSGE model," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2013/08, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  8. Nikolay Markov & Carlos de Porres, 2011. "Is the Taylor Rule Nonlinear? Empirical Evidence from a Semi-Parametric Modeling Approach," Research Papers by the Institute of Economics and Econometrics, Geneva School of Economics and Management, University of Geneva, Institut d'Economie et Econométrie, Université de Genève 11052, Institut d'Economie et Econométrie, Université de Genève.
  9. He, Xiaoli & Jacobs, Jan P.A.M. & Kuper, Gerard H. & Ligthart, Jenny E., 2013. "On the Impact of the Global Financial Crisis on the Euro Area," Working Papers, University of Tasmania, School of Economics and Finance 17209, University of Tasmania, School of Economics and Finance, revised 16 Oct 2013.
  10. Nikolay Markov, 2010. "A Regime Switching Model for the European Central Bank," Research Papers by the Institute of Economics and Econometrics, Geneva School of Economics and Management, University of Geneva, Institut d'Economie et Econométrie, Université de Genève 10091, Institut d'Economie et Econométrie, Université de Genève.

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