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How the central bank’s reaction function in small open economies evolved during the crisis

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  • Aleksandra Halka

    () (Narodowy Bank Polski)

Abstract

The experience of the global financial crisis caused central banks to change the way the monetary policy is conducted, in particular it changed their reaction function. This study investigates how four selected European central banks in small open economies have changed their reaction function in response to the GFC. To address this problem a logit model is used to see, firstly, how the relative importance of GDP growth forecasts in the process of setting interest rates evolved over time, secondly, how the CPI forecast horizon which central banks take into consideration has changed and, finally, how the monetary policy stance has changed. The outcomes indicate that all banks in the course of the crisis have become more flexible in the way they conduct monetary policy – Polish and Hungarian central banks increased the relative importance of GDP growth as compared to inflation development, Czech and Swedish central banks increased the forecast horizon for inflation and all but the Swedish central bank started to conduct a more accommodative monetary policy.

Suggested Citation

  • 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.
  • Handle: RePEc:nbp:nbpbik:v:47:y:2016:i:4:p:301-318
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    More about this item

    Keywords

    central bank; reaction function; monetary policy; logit model; global financial crisis;

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • 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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