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What Determines the Success of the ECB's Monetary Policy

Author

Listed:
  • Milutin Jesic

    (University of Belgrade, Serbia)

  • Hans Manner

    (University of Graz, Austria)

Abstract

The European Central Bank (ECB) adopted a new monetary policy strategy in July 2021 to replace the previous one that had been in place since 2003. This study implicitly analyzes the performance of the previous strategy in achieving price stability by identifying the key macroeconomic determinants that influence inflation dynamics. Methodologically, we apply the nonstationary ordered probit model, which allows the estimation of marginal effects of covariates on the probability of the inflation rate being below, in, or above the assumed targeted range. The results indicate that the crucial determinants of deviation in the inflation rate from the targeted range are fundamental macroeconomic variables, of which some are indirectly under control of the ECB. While the inflation rate has occasionally deviated from the targeted range, the overall conclusion is that the performance of the ECB in fulfilling the primary goal defined in the monetary policy strategy is still manageable to the extent that it can influence some of the factors that are identified as drivers of inflation dynamics.

Suggested Citation

  • Milutin Jesic & Hans Manner, 2024. "What Determines the Success of the ECB's Monetary Policy," Graz Economics Papers 2024-17, University of Graz, Department of Economics.
    • Handle: RePEc:grz:wpaper:2024-17
    as

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    References listed on IDEAS

    as
    1. Rodolfo Arioli & Colm Bates & Heinz Dieden & Ioana Duca & Roberta Friz & Christian Gayer & Geoff Kenny & Aidan Meyler & Iskra Pavlova, 2016. "EU Consumers’ Quantitative Inflation Perceptions and Expectations: An Evaluation," European Economy - Discussion Papers 038, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    2. Philippe Andrade & Jordi Gali & Hervé Le Bihan & Julien Matheron, 2021. "Should the ECB Adjust Its Strategy in the Face of a Lower r*?," Working Papers 22-1, Federal Reserve Bank of Boston.
    3. Andersson, Fredrik N. G. & Jonung, Lars, 2017. "How Tolerant Should Inflation-Targeting Central Banks Be? Selecting the Proper Tolerance Band - Lessons from Sweden," Working Papers 2017:2, Lund University, Department of Economics.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    ECB; monetary policy; monetary policy strategy; nonstationary ordered probit model; inflation.;
    All these keywords.

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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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