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

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  • Stefan Gerlach
  • John Lewis

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 Netherlands Central Bank, Research Department in its series DNB Working Papers with number 254.

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Date of creation: Jul 2010
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Handle: RePEc:dnb:dnbwpp:254

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Keywords: ECB; reaction functions; zero lower bound; smooth transition;

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  1. Günter Coenen & Volker W. Wieland, 2004. "Exchange-Rate Policy and the Zero Bound on Nominal Interest Rates," American Economic Review, American Economic Association, vol. 94(2), pages 80-84, May.
  2. Coenen, Günter & Orphanides, Athanasios & Wieland, Volker, 2003. "Price stability and monetary policy effectiveness when nominal interest rates are bounded at zero," Working Paper Series 0231, European Central Bank.
  3. Roberto M. Billi & Klaus Adam, 2004. "Optimal Monetary Policy under Commitment with a Zero Bound on Nominal Interest Rates," Computing in Economics and Finance 2004 67, Society for Computational Economics.
  4. 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.
  5. Lars E O Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Bank of England working papers 56, Bank of England.
  6. Gerlach, Stefan & Schnabel, Gert, 2000. "The Taylor rule and interest rates in the EMU area," Economics Letters, Elsevier, vol. 67(2), pages 165-171, May.
  7. Coenen, Günter & Levin, Andrew & Wieland, Volker, 2003. "Data Uncertainty and the Role of Money as an Information Variable for Monetary Policy," CEPR Discussion Papers 3812, C.E.P.R. Discussion Papers.
  8. N. Gregory Mankiw & Jeffrey A. Miron & David N. Weil, 1987. "The Adjustment of Expectations to a Change in Regime: A Study of the Founding of the Federal Reserve," NBER Working Papers 2124, National Bureau of Economic Research, Inc.
  9. Gerlach-Kristen, Petra, 2003. "Interest rate reaction functions and the Taylor rule in the euro area," Working Paper Series 0258, European Central Bank.
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Cited by:
  1. Nikolay Markov & Thomas Nitschka, 2013. "Estimating Taylor Rules for Switzerland: Evidence from 2000 to 2012," Working Papers 2013-08, Swiss National Bank.
  2. Yüksel, Ebru & Metin-Ozcan, Kivilcim & Hatipoglu, Ozan, 2013. "A survey on time-varying parameter Taylor rule: A model modified with interest rate pass-through," Economic Systems, Elsevier, vol. 37(1), pages 122-134.
  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. Rossana Merola, 2013. "The role of financial frictions in the 2007-2008 crisis: an estimated DSGE model," Working Papers Department of Economics 2013/08, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  5. Stefan Gerlach & John Lewis, 2014. "ECB Reaction Functions and the Crisis of 2008," International Journal of Central Banking, International Journal of Central Banking, vol. 10(1), pages 137-158, March.
  6. Kuper, Gerard & Jacobs, Jan & He, Xiaoli & Ligthart, Jenny, 2013. "On the impact of the global financial crisis on the euro area," Research Report 13011-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  7. 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 10091, Institut d'Economie et Econométrie, Université de Genève.
  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 11052, Institut d'Economie et Econométrie, Université de Genève.
  9. Merola, Rossana, 2014. "The role of financial frictions during the crisis: an estimated DSGE model," Dynare Working Papers 33, CEPREMAP.
  10. Aastrup, Morten & Jensen, Henrik, 2010. "What Drives the European Central Bank's Interest-Rate Changes?," CEPR Discussion Papers 8160, C.E.P.R. Discussion Papers.

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