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Zero lower bound, ECB interest rate policy and the financial crisis

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  • Stefan Gerlach
  • John Lewis

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Abstract

We explore whether the ECB’s interest rate setting behaviour changed during the financial crisis by estimating reaction functions over the period 1999–2010, allowing for a smooth transition from one set of parameters to another. The estimates show a swift change in the months following the collapse of Lehman brothers. The ECB appears to have cut rates more aggressively than expected solely on the basis of the worsening of macroeconomic conditions, consistent with the theoretical literature on optimal monetary policy in the vicinity of the zero bound. Copyright Springer-Verlag Berlin Heidelberg 2014

Suggested Citation

  • Stefan Gerlach & John Lewis, 2014. "Zero lower bound, ECB interest rate policy and the financial crisis," Empirical Economics, Springer, vol. 46(3), pages 865-886, May.
  • Handle: RePEc:spr:empeco:v:46:y:2014:i:3:p:865-886
    DOI: 10.1007/s00181-013-0713-6
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. 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.
    2. Dimitris P. Louzis, 2014. "Macroeconomic and credit forecasts in a small economy during crisis: A large Bayesian VAR approach," Working Papers 184, Bank of Greece.
    3. repec:spr:empeco:v:53:y:2017:i:2:d:10.1007_s00181-016-1128-y is not listed on IDEAS
    4. Jung, Alexander, 2016. "Have monetary data releases helped markets to predict the interest rate decisions of the European Central Bank?," Working Paper Series 1926, European Central Bank.

    More about this item

    Keywords

    ECB; Reaction functions; Zero lower bound; Smooth transition; C2; E52;

    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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