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Interest Rate Setting by the ECB, 1999-2006: Words and Deeds

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  • Stefan Gerlach

    (Institute for Monetary and Financial Stability, Johann Wolfgang Goethe University, Frankfurt am Main)

Abstract

We estimate empirical reaction functions for the European Central Bank (ECB) with ordered-probit techniques, using the ECB's Monthly Bulletin to guide the choice of variables. The results show that policy reacts to the state of the real economy, M3 growth, and exchange rate changes but not to inflation. We develop quantitative indicators of the Governing Council's assessment of economic conditions to understand its interest rate decisions and argue that the ECB has not reacted to inflation shocks because they were seen as temporary. By contrast, policy responses to economic activity are strong because it impacts on the outlook for inflation.

Suggested Citation

  • Stefan Gerlach, 2007. "Interest Rate Setting by the ECB, 1999-2006: Words and Deeds," International Journal of Central Banking, International Journal of Central Banking, vol. 3(3), pages 1-46, September.
    • Handle: RePEc:ijc:ijcjou:y:2007:q:3:a:1
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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

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