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Lessons from the crisis.Did central banks do their homework?

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  • Aleksandra Halka

Abstract

The outbreak of the global financial crisis triggered changes in thinking about the way monetary policy is conducted, in particular about the desired central banks’ reaction function. However, a change in thinking does not necessarily mean that central banks really implemented these modifications. Therefore, I investigate whether four selected European central banks in small open economies – ˇCesk´a N´arodn´ı Banka, Magyar Nemzeti Bank, Narodowy Bank Polski and Sveriges Riksbank, have adjusted their reaction function to the new paradigm of how monetary policy should be conducted. To address this problem I use a logit model to see first, how the relative importance of inflation and GDP forecasts in the process of setting interest rates evolved over time, second, how the forecast horizon which central banks take into consideration when setting the interest rate has changed, and finally whether they conduct more accommodative monetary policy. The outcomes indicate that all banks after the Lehman Brother’s collapse became more flexible in the way they conduct monetary policy. In order to maintain the stability of the whole economy they are ready to accept an extended period or greater deviations of inflation from the target, although each one in its own way – through extension of the forecasting horizon, the increase of the GDP’s importance, permanent shift of the monetary policy stance to more accommodative one or a mixture of these factors.

Suggested Citation

  • Aleksandra Halka, 2015. "Lessons from the crisis.Did central banks do their homework?," NBP Working Papers 224, Narodowy Bank Polski, Economic Research Department.
  • Handle: RePEc:nbp:nbpmis:224
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    More about this item

    Keywords

    product-level inflation; CEE economies; multi-level factor model.;

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • 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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