Verifying Time Inconsistency of the ECB Monetary Policy bya Regime-Switching Approach
AbstractThis work aims to verify whether there is an inflation bias in the Euro-area monetary policy. One verify the presence of a strategic repeated game between the European Central Bank and the market in setting actual and expected inflation and what the features of this game are. In particular, the aim is to verify whether the market fixes the expected inflation strategically and how the probability about the kind of monetary policy is formed. One concludes that the market behaves strategically but the inflation bias does not emerge from data. The ECB is not deemed credible with a probability of one third. However, it is clear that the source of credibility cannot be the lack of commitment of the bank, but it can be the 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.
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Bibliographic InfoPaper provided by Center for Quantitative Economics (CQE), University of Muenster in its series CQE Working Papers with number 2212.
Length: 43 pages
Date of creation: Jan 2012
Date of revision:
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Postal: Am Stadtgraben 9, 48143 Münster, Germany
Web page: http://www1.wiwi.uni-muenster.de/cqe/
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Time Inconsistency of monetary policy; Repeated Game; Markov-switching model;
Find related papers by 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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