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Does ECB Communication Help in Predicting its Interest Rate Decisions?

  • David-Jan Jansen
  • Jakob de Haan

We examine the usefulness of communication by the European Central Bank for predicting its interest rate decisions. We use ordered probit models based on the Taylor rule which we estimate using statements by ECB officials as well as macroeconomic variables. Statements by ECB officials on the main refinancing rate and future inflation are significantly related to ECB decisions. However, an out-of-sample evaluation shows that communication-based models do not outperform models based on macroeconomic data in predicting decisions. Both sets of models only accurately predict decisions to leave interest rates unchanged.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1804.

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Date of creation: 2006
Date of revision:
Handle: RePEc:ces:ceswps:_1804
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  1. Ben S. Bernanke & Vincent R. Reinhart & Brian P. Sack, 2004. "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 35(2), pages 1-100.
  2. Ling Hu & Peter C.B. Phillips, 2002. "Nonstationary Discrete Choice," Cowles Foundation Discussion Papers 1364, Cowles Foundation for Research in Economics, Yale University.
  3. Ehrmann, Michael & Fratzscher, Marcel, 2005. "Communication and decision-making by central bank committees: different strategies, same effectiveness?," Working Paper Series 0488, European Central Bank.
  4. Gunter Coenen & Andrew Levin & Volker Wieland, 2001. "Data uncertainty and the role of money as an information variable for monetary policy," Finance and Economics Discussion Series 2001-54, Board of Governors of the Federal Reserve System (U.S.).
  5. Heinemann, Friedrich & Ullrich, Katrin, 2005. "Does it Pay to Watch Central Bankers' Lips? The Information Content of ECB Wording," ZEW Discussion Papers 05-70, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  6. Gerlach, Stefan, 2004. "Interest Rate Setting by the ECB: Words and Deeds," CEPR Discussion Papers 4775, C.E.P.R. Discussion Papers.
  7. Carlo Rosa & Giovanni Verga, 2005. "Is ECB Communication Effective?," CEP Discussion Papers dp0682, Centre for Economic Performance, LSE.
  8. John S. Lapp & Douglas K. Pearce & Surachit Laksanasut, 2003. "The Predictability of FOMC Decisions: Evidence from the Volcker and Greenspan Chairmanships," Southern Economic Journal, Southern Economic Association, vol. 70(2), pages 312-327, October.
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