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Re-examining the ECB’s two-pillar monetary policy strategy: Are there any deviations during and the pre-financial crisis periods?

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  • Ahmad Hassan Ahmad

    () (Loughborough University)

  • Stephen Brown

    (University of Bath)

Abstract

This paper addresses the extent to which the ECB rate setting responded to inflation and monetary growth in the run up to, and during, the financial crisis of the late 2000s. The analysis covers the period between 1999:01 and 2013:12, split into pre-crisis and financial crisis periods using a structural break test. In addition, a number of specifications are examined, including those in which only positive or negative policy rate changes are used as the dependent variable. An ordered probit model is used as it is deemed more appropriate for modelling discrete economic behaviour, such as policy rate changes, than continuous time series methods. The results from the pre-crisis period show that, although the monetary aggregate was significant in models that incorporate all the policy changes, but when considering just positive policy rate changes, the coefficient for monetary growth is not only small, but also statistically insignificant. Hence, this casts doubt on the extent to which monetary growth influenced the ECB policy rate decisions prior to the financial crisis. The monetary growth coefficients for the crisis period are also found to be insignificant. However, unlike during the pre-crisis period, the coefficient for inflation is found to be both positive and statistically significant, thus confirming qualitative perceptions that the ECB prioritised its price-stability mandate over concerns that the Euro Area sovereign debt crisis.

Suggested Citation

  • Ahmad Hassan Ahmad & Stephen Brown, 2017. "Re-examining the ECB’s two-pillar monetary policy strategy: Are there any deviations during and the pre-financial crisis periods?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 44(3), pages 585-607, August.
  • Handle: RePEc:kap:empiri:v:44:y:2017:i:3:d:10.1007_s10663-016-9339-1
    DOI: 10.1007/s10663-016-9339-1
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    References listed on IDEAS

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    More about this item

    Keywords

    ECB; Monetary policy; Financial crisis;

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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