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Forecast Targeting and Financial Stability: Evidence from the European Central Bank and Bank of England

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  • Curi, Claudia
  • Murgia, Lucia Milena

Abstract

This paper investigates whether financial markets stability matters in setting monetary policy in the case of the European Central Bank and Bank of England. We show that our Tri-mandate Taylor rule better explains the deviations of the observed policy rate from the implied interest rates for both central banks. The forward-looking version shows that the monetary policy conducted by the ECB is largely affected by the US financial market stability, while only the domestic financial market stability affects the BOE. Lastly, we show that the preferences of monetary policy makers have shifted in the aftermath of the 2008 financial crisis.

Suggested Citation

  • Curi, Claudia & Murgia, Lucia Milena, 2023. "Forecast Targeting and Financial Stability: Evidence from the European Central Bank and Bank of England," Finance Research Letters, Elsevier, vol. 51(C).
    • Handle: RePEc:eee:finlet:v:51:y:2023:i:c:s1544612322006626
    DOI: 10.1016/j.frl.2022.103486
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    More about this item

    Keywords

    Central bank; Financial Stability; Forecast Targeting; Monetary Policy; Taylor Rule; Tri-mandate;
    All these keywords.

    JEL classification:

    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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