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How the European Central Bank decided its early monetary policy?

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  • Jesus Garcia-Iglesias

Abstract

The main goal of this paper is to detect the mechanisms that should rationally stimulate the decision making-policies of the European Central Bank (ECB). This is carried out under the framework of theoretical principles of interest rate rules. Firstly, we deduce a set of logically advisable guidelines for the strategy actually developed by this central bank. Then we contrast a wide set of hypotheses with reference to those variables the ECB takes into account on deciding its monetary policy, with a flexible treatment regarding the number of months of advance or delay in the explanatory variables. The results lead us to the conclusion that the ECB, besides adopting a smooth strategy, especially bears in mind the expected core inflation rate, with a reaction coefficient adjusted to that initially proposed by Taylor. The economic growth rate, though it has a significant positive coefficient, matters relatively little and is backward looking. Finally, we evaluate up to what point the behaviour of the ECB is assimilative to an inflation targeting framework, solving this question affirmatively.

Suggested Citation

  • Jesus Garcia-Iglesias, 2007. "How the European Central Bank decided its early monetary policy?," Applied Economics, Taylor & Francis Journals, vol. 39(7), pages 927-936.
    • Handle: RePEc:taf:applec:v:39:y:2007:i:7:p:927-936
    DOI: 10.1080/00036840500461931
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    Cited by:

    1. Benchimol, Jonathan & Fourçans, André, 2009. "Money in a DSGE framework with an application to the Euro Zone," ESSEC Working Papers DR 09005, ESSEC Research Center, ESSEC Business School.
    2. David-Jan Jansen & Jakob De Haan, 2009. "Has ECB communication been helpful in predicting interest rate decisions? An evaluation of the early years of the Economic and Monetary Union," Applied Economics, Taylor & Francis Journals, vol. 41(16), pages 1995-2003.
    3. Jesus M. Garcia-Iglesias & Rebeca Muñoz Torres & George Saridakis, 2013. "Did the Bank of Mexico follow a systematic behaviour in its transition to an inflation targeting regime?," Applied Financial Economics, Taylor & Francis Journals, vol. 23(14), pages 1205-1213, July.
    4. Jonathan Benchimol & André Fourçans, 2010. "Money and risk aversion in a DSGE framework: a Bayesian application to the Euro zone," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00800082, HAL.
    5. Belke, Ansgar & Klose, Jens, 2009. "Does the ECB Rely on a Taylor Rule? - Comparing Ex-post with Real Time Data," Ruhr Economic Papers 133, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    6. Ansgar Belke & Jens Klose, 2011. "Does the ECB Rely on a Taylor Rule During the Financial Crisis? Comparing Ex-post and Real Time Data with Real Time Forecasts," Economic Analysis and Policy, Elsevier, vol. 41(2), pages 147-171, September.
    7. Aymeric Ortmans, 2020. "Evolving Monetary Policy in the Aftermath of the Great Recession," Documents de recherche 20-01, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    8. Baranowski, Paweł, . "Reguła Taylora i jej rozszerzenia," Gospodarka Narodowa-The Polish Journal of Economics, Szkoła Główna Handlowa w Warszawie / SGH Warsaw School of Economics, vol. 2008(7-8).
    9. Fourçans, André & Vranceanu, Radu, 2008. "Money in the Inflation Equation: the Euro Area Evidence," ESSEC Working Papers DR 08012, ESSEC Research Center, ESSEC Business School.
    10. Libero Monteforte & Stefano Siviero, 2010. "The economic consequences of euro-area macro-modelling shortcuts," Applied Economics, Taylor & Francis Journals, vol. 42(19), pages 2399-2415.
    11. Paweł Baranowski, 2008. "Reguła Taylora i jej rozszerzenia," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 7-8, pages 1-23.

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