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Estimating the ECB policy reaction function

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  • Carstensen, Kai

Abstract

This paper estimates the policy reaction function of the European Central Bank in the first four years of EMU using an ordered probit model which accounts for the fact that central bank rates are set at multiples of 25 basis points. Starting from a baseline model which mimics the Taylor rule, the impacts of different economic variables on interest rate decisions are analysed. It is concluded that the monetary growth measure which was announced by the ECB as the first pillar of their monetary strategy does not play an outstanding role for the actual interest rate decisions. More sophisticated measures like the money overhang which uses information from both pillars are better suited. Overall, it is concluded that the revision of the monetary policy strategy in May 2003 which implied a downgrading of the first pillar will not induce any observable changes in monetary policy decisions.

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Bibliographic Info

Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 19941.

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Date of creation: 2006
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Publication status: Published in German Economic Review 1 7(2006): pp. 1-34
Handle: RePEc:lmu:muenar:19941

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  1. Rudebusch, Glenn D & Svensson, Lars E O, 2000. "Eurosystem Monetary Targeting: Lessons from US Data," CEPR Discussion Papers 2522, C.E.P.R. Discussion Papers.
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  15. Bindseil, Ulrich & Seitz, Franz, 2001. "The supply and demand for Eurosystem deposits - The first 18 months," Working Paper Series 0044, European Central Bank.
  16. Paolo Surico, 2003. "How does the ECB target inflation?," Macroeconomics 0305005, EconWPA.
  17. Fritz Breuss, 2002. "Was ECB's monetary policy optimal?," Atlantic Economic Journal, International Atlantic Economic Society, vol. 30(3), pages 298-319, September.
  18. Klaus Masuch & Sergio Nicoletti-Altimari & Massimo Rostagno & Huw Pill, 2003. "The role of money in monetary policymaking," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 158-191 Bank for International Settlements.
  19. Davutyan, Nurhan & Parke, William R, 1995. "The Operations of the Bank of England, 1890-1908: A Dynamic Probit Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1099-1112, November.
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