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ECB Reaction Functions and the Crisis of 2008

Author

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  • Stefan Gerlach

    (Central Bank of Ireland and CEPR)

  • John Lewis

    (Economics and Research Division, De Nederlandsche Bank)

Abstract

We estimate a reaction function for the European Central Bank (ECB) using forecasts of economic growth and inflation as regressors. We detect a shift after Lehman Brothers failed in September 2008 when the pre-crisis reaction function indicates that the zero lower bound may become a constraint. We detect a shift back in the second half of 2010, several months prior to the April 2011 rate increase. The interest rate cuts in 2008 were more aggressive than forecast by the pre-crisis reaction function. These findings are compatible with the literature on optimal monetary policy in the presence of a zero lower bound.

Suggested Citation

  • 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.
  • Handle: RePEc:ijc:ijcjou:y:2014:q:1:a:4
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    References listed on IDEAS

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    Cited by:

    1. Sznajderska, Anna, 2014. "Asymmetric effects in the Polish monetary policy rule," Economic Modelling, Elsevier, vol. 36(C), pages 547-556.
    2. Aleksandra Halka, 2016. "How the central bank’s reaction function in small open economies evolved during the crisis," Bank i Kredyt, Narodowy Bank Polski, vol. 47(4), pages 301-318.
    3. Dirk Bleich & Ralf Fendel & Jan-Christoph Rülke, 2013. "Monetary Policy and Stock Market Volatility," Economics Bulletin, AccessEcon, vol. 33(3), pages 1669-1680.
    4. Jinill Kim & Seth Pruitt, 2017. "Estimating Monetary Policy Rules When Nominal Interest Rates Are Stuck at Zero," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(4), pages 585-602, June.
    5. Paloviita, Maritta & Haavio, Markus & Jalasjoki, Pirkka & Kilponen, Juha, 2017. "What does “below, but close to, two percent” mean? Assessing the ECB’s reaction function with real time data," Research Discussion Papers 29/2017, Bank of Finland.
    6. repec:eee:ecolet:v:162:y:2018:i:c:p:177-181 is not listed on IDEAS

    More about this item

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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