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Market perceptions, monetary policy, and credibility

Author

Listed:
  • Vincenzo Cuciniello

    (Bank of Italy)

Abstract

This paper presents novel time-varying estimates of the monetary policy rule as perceived by financial markets, focusing on days of heightened inflation-linked swap rate volatility corresponding to preliminary inflation release dates in the euro area. My findings reveal significant fluctuations in the perceived responsiveness of monetary policy to inflation, reflecting shifts in the ECB's concerns regarding price stability risks. Moreover, the sensitivity of this perceived responsiveness to monetary shocks varies based on prevailing inflation expectations, with tighter policy having a greater impact in high-inflation environments. Lastly, a stronger perceived monetary policy response to inflation enhances policy credibility by dampening the sensitivity of long-term inflation expectations to short-term fluctuations.

Suggested Citation

  • Vincenzo Cuciniello, 2024. "Market perceptions, monetary policy, and credibility," Temi di discussione (Economic working papers) 1449, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1449_24
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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2024/2024-1449/en_tema_1449.pdf
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    More about this item

    Keywords

    European Central Bank; monetary policy rule; credibility; financial market expectations; macroeconomic data releases;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General

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