IDEAS home Printed from https://ideas.repec.org/p/imf/imfwpa/2002-233.html
   My bibliography  Save this paper

Market Predictability of ECB Policy Decisions: A Comparative Examination

Author

Listed:
  • Mr. Kevin Ross

Abstract

Many surveys of the ECB's monetary framework emphasize the inability of financial markets to correctly predict monetary policy decisions. At the same time, these surveys of financial market participants have given relatively high marks to the United States Federal Reserve and the Bank of England on their ability to be understood by financial markets. Against this background, this paper examines the ability of financial markets to correctly anticipate these three central bank policy decisions over the first 3½ years of the ECB. The paper relies on calculations that market participants employ in anticipating policy changes and on term structure regressions that provide ex post evidence of market surprises. While the results suggest that all three central banks are broadly predictable, markets have had difficulty anticipating large changes and cuts in ECB policy interest rates. These surprises may be tied to the large number of policy meetings, particular characteristics of the EONIA money market, and the unique circumstances of the ECB. An added factor may be the absence of a consistent policy on communicating the current stance-if any-of the ECB's policy bias on the future direction of interest rates.

Suggested Citation

  • Mr. Kevin Ross, 2002. "Market Predictability of ECB Policy Decisions: A Comparative Examination," IMF Working Papers 2002/233, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2002/233
    as

    Download full text from publisher

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=16227
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Gabriel Pérez Quirós & Hugo Rodríguez, 2000. "The daily market for funds in Europe: Has something changed with the EMU?," Economics Working Papers 474, Department of Economics and Business, Universitat Pompeu Fabra.
    2. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
    3. Hartmann, Philipp & Manna, Michele & Manzanares, Andres, 2001. "The microstructure of the euro money market," Journal of International Money and Finance, Elsevier, vol. 20(6), pages 895-948, November.
    4. Gaspar, Vitor & Perez-Quiros, Gabriel & Sicilia, Jorge, 2001. "The ECB Monetary Policy Strategy and the Money Market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(4), pages 325-342, October.
    5. Joel T. Krueger & Kenneth N. Kuttner, 1996. "The Fed funds futures rate as a predictor of federal reserve policy," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(8), pages 865-879, December.
    6. Bank for International Settlements, 2001. "Comparing monetary policy operating procedures across the United States, Japan and the euro area," BIS Papers, Bank for International Settlements, number 09.
    7. John C. Robertson & Daniel L. Thornton, 1997. "Using federal funds futures rates to predict Federal Reserve actions," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 45-53.
    8. Denis Blenck & Harri Hasko & Spence Hilton & Kazuhiro Masaki, 2001. "The main features of the monetary policy frameworks of the Bank of Japan, the Federal Reserve and the Eurosystem," BIS Papers chapters, in: Bank for International Settlements (ed.), Comparing monetary policy operating procedures across the United States, Japan and the euro area, volume 9, pages 23-56, Bank for International Settlements.
    9. William Poole & Robert Rasche, 2000. "Perfecting the Market's Knowledge of Monetary Policy," Journal of Financial Services Research, Springer;Western Finance Association, vol. 18(2), pages 255-298, December.
    10. Andrew G Haldane & Vicky Read, 2000. "Monetary policy surprises and the yield curve," Bank of England working papers 106, Bank of England.
    11. Robert H. Rasche & Daniel L. Thornton, 2002. "The FOMC's balance-of-risks statement and market expectations of policy actions," Review, Federal Reserve Bank of St. Louis, vol. 84(Sep), pages 37-50.
    12. Lorenzo Bini-Smaghi & Daniel Gros, 2001. "Is the ECB Sufficiently Accountable and Transparent?," Economics Working Papers 007, European Network of Economic Policy Research Institutes.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Pérez Quirós, Gabriel & Sicilia, Jorge, 2002. "Is the European Central Bank (and the United States Federal Reserve) predictable?," Working Paper Series 192, European Central Bank.
    2. Gaspar, Vitor & Perez-Quiros, Gabriel & Sicilia, Jorge, 2001. "The ECB Monetary Policy Strategy and the Money Market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(4), pages 325-342, October.
    3. Gaspar, Vitor & Perez-Quiros, Gabriel & Sicilia, Jorge, 2001. "The ECB Monetary Policy Strategy and the Money Market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(4), pages 325-342, October.
    4. Bjørn-Roger Wilhelmsen & Andrea Zaghini, 2011. "Monetary policy predictability in the euro area: an international comparison," Applied Economics, Taylor & Francis Journals, vol. 43(20), pages 2533-2544.
    5. Gabriel Pérez Quirós & Jorge Sicilia, 2002. "Is the European Central Bank (and the United States Federal Reserve) predictable?," Working Papers 0229, Banco de España;Working Papers Homepage.
    6. Amir Kia & Hilde Patron, 2004. "Market-Based Monetary Policy Transparency Index, Risk and Volatility - The Case of the United States," Carleton Economic Papers 04-07, Carleton University, Department of Economics.
    7. Adrienne Kearney & Raymond Lombra, 2003. "Fed funds futures and the news," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 31(4), pages 330-337, December.
    8. Kenneth B. Petersen & Vladimir Pozdnyakov, 2008. "Predicting the Fed," Working papers 2008-07, University of Connecticut, Department of Economics.
    9. Amir KIA, 2009. "Developing a Market-Based Monetary Policy Transparency Index and Testing Its Impact on Risk and Volatility in the United States," EcoMod2009 21500052, EcoMod.
    10. Gurkaynak, Refet S. & Sack, Brian T. & Swanson, Eric P., 2007. "Market-Based Measures of Monetary Policy Expectations," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 201-212, April.
    11. Leonardo Bartolini & Alessandro Prati, 2003. "The execution of monetary policy: a tale of two central banks [‘Estimating continuous-time stochastic volatility models of the short-term interest rate’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 18(37), pages 435-467.
    12. Richard Austin & Jeff Moore, 2002. "The behavior of federal funds futures prices over the monetary policy cycle," Economic Review, Federal Reserve Bank of Atlanta, vol. 87(Q2), pages 45-61.
    13. Green, Christopher & Bai, Ye & Murinde, Victor & Ngoka, Kethi & Maana, Isaya & Tiriongo, Samuel, 2016. "Overnight interbank markets and the determination of the interbank rate: A selective survey," International Review of Financial Analysis, Elsevier, vol. 44(C), pages 149-161.
    14. James D. Hamilton, 2009. "Daily Changes in Fed Funds Futures Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(4), pages 567-582, June.
    15. repec:hal:spmain:info:hdl:2441/5221 is not listed on IDEAS
    16. Tuysuz, Sukriye, 2007. "The asymmetric impact of macroeconomic announcements on U.S. Government bond rate level and volatility," MPRA Paper 5381, University Library of Munich, Germany.
    17. Xinsheng Lu & Ling Qu & Ying Zhou, 2015. "The Impact of Monetary Surprises on Australian Financial Futures Markets: An Insight into Cash Rate Target Announcements," Australian Economic Papers, Wiley Blackwell, vol. 54(3), pages 151-166, September.
    18. Monticini & Vaciago, 2004. "Are Europe Interest Rates led by FED's Announcements?," Macroeconomics 0407025, University Library of Munich, Germany.
    19. Sarno, Lucio & Thornton, Daniel L., 2003. "The dynamic relationship between the federal funds rate and the Treasury bill rate: An empirical investigation," Journal of Banking & Finance, Elsevier, vol. 27(6), pages 1079-1110, June.
    20. Dominique Guegan & Florian Ielpo, 2008. "Flexible time series models for subjective distribution estimation with monetary policy in view," PSE-Ecole d'économie de Paris (Postprint) halshs-00368356, HAL.
    21. Bruno Ducoudre, 2008. "Structure par terme des taux d’intérêt et anticipations de la politique économique," Sciences Po publications info:hdl:2441/5221, Sciences Po.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:2002/233. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Akshay Modi (email available below). General contact details of provider: https://edirc.repec.org/data/imfffus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.