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Verifying Time Inconsistency of the ECB Monetary Policy bya Regime-Switching Approach

Author

Listed:
  • Andrea Beccarini

Abstract

This work aims to verify whether there is an inflation bias in the Euro-area monetary policy. One verify the presence of a strategic repeated game between the European Central Bank and the market in setting actual and expected inflation and what the features of this game are. In particular, the aim is to verify whether the market fixes the expected inflation strategically and how the probability about the kind of monetary policy is formed. One concludes that the market behaves strategically but the inflation bias does not emerge from data. The ECB is not deemed credible with a probability of one third. However, it is clear that the source of credibility cannot be the lack of commitment of the bank, but it can be the partial inability to control or to communicate economic shocks. These conclusions are robust to two different estimation strategies which are both based on regime-switching regressions.

Suggested Citation

  • Andrea Beccarini, 2012. "Verifying Time Inconsistency of the ECB Monetary Policy bya Regime-Switching Approach," CQE Working Papers 2212, Center for Quantitative Economics (CQE), University of Muenster.
    • Handle: RePEc:cqe:wpaper:2212
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    File URL: https://www.wiwi.uni-muenster.de/cqe/sites/cqe/files/CQE_Paper/CQE_WP_22_2012.pdf
    File Function: Version of January, 2012
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    More about this item

    Keywords

    Time Inconsistency of monetary policy; Repeated Game; Markov-switching model;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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