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Interest Rate Setting by the ECB: Words and Deeds

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  • Gerlach, Stefan

Abstract

This Paper discusses interest rate setting by the ECB between 1999 and 2004. I develop from the Monthly Bulletins quantitative indicators of the Governing Council’s assessment of inflation, economic activity, and M3 growth, and investigate their impact on its interest rate decisions. I also estimate reaction functions with ordered probit techniques, using the Monthly Bulletins to guide the choice of variables for the analysis. The results show that the ECB reacts strongly to economic sentiment indicators as measures of the state of the real economy. Furthermore, I find statistically significant reactions to inflation and M3 growth.

Suggested Citation

  • Gerlach, Stefan, 2004. "Interest Rate Setting by the ECB: Words and Deeds," CEPR Discussion Papers 4775, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4775
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    References listed on IDEAS

    as
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    Keywords

    ECB; empirical reaction functions; ordered probit;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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