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

  • Stefan Gerlach
  • John Lewis

    ()

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

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File URL: http://hdl.handle.net/10.1007/s00181-013-0713-6
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Article provided by Springer in its journal Empirical Economics.

Volume (Year): 46 (2014)
Issue (Month): 3 (May)
Pages: 865-886

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Handle: RePEc:spr:empeco:v:46:y:2014:i:3:p:865-886
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  1. Gerlach, Stefan, 2011. "ECB Repo Rate Setting During the Financial Crisis," CEPR Discussion Papers 8346, C.E.P.R. Discussion Papers.
  2. Coenen, Günter & Wieland, Volker, 2003. "The Zero-Interest Rate Bound and the Role of the Exchange Rate for Monetary Policy in Japan," CEPR Discussion Papers 3895, C.E.P.R. Discussion Papers.
  3. Svensson, Lars-E-O, 2001. "The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 277-312, February.
  4. Adam, Klaus & Billi, Roberto M., 2004. "Optimal monetary policy under commitment with a zero bound on nominal interest rates," Working Paper Series 0377, European Central Bank.
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  9. Gerlach, Stefan, 2003. "Recession Aversion, Output and the Kydland-Prescott Barro-Gordon Model," CEPR Discussion Papers 3687, C.E.P.R. Discussion Papers.
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  15. Janko Gorter & Fauve Stolwijk & Jan Jacobs & Jakob de Haan, 2010. "ECB Policy Making and the Financial Crisis," DNB Working Papers 272, Netherlands Central Bank, Research Department.
  16. Günter Coenen & Volker W. Wieland, 2004. "Exchange-Rate Policy and the Zero Bound on Nominal Interest Rates," American Economic Review, American Economic Association, vol. 94(2), pages 80-84, May.
  17. Lawrence H. Summers, 1991. "Panel discussion: price stability ; How should long-term monetary policy be determined?," Proceedings, Federal Reserve Bank of Cleveland, pages 625-631.
  18. Athanasios Orphanides & Volker W. Wieland, 1998. "Price stability and monetary policy effectiveness when nominal interest rates are bounded at zero," Finance and Economics Discussion Series 1998-35, Board of Governors of the Federal Reserve System (U.S.).
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