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