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Why do financial market experts misperceive future monetary policy decisions?

Author

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  • Schmidt, Sandra
  • Nautz, Dieter

Abstract

This paper investigates why financial market experts misperceive the interest rate policy of the European Central Bank (ECB). Assuming a Taylor-rule-type reaction function of the ECB, we use qualitative survey data on expectations about the future interest rate, inflation, and output to discover the sources of individual interest rate forecast errors. Based on a panel random coefficient model, we show that financial experts have systematically misperceived the ECB's interest rate rule. However, although experts tend to overestimate the impact of inflation on future interest rates, perceptions of monetary policy have become more accurate since clarification of the ECB's monetary policy strategy in May 2003. We find that this improved communication has reduced disagreement over the ECB's response to expected inflation during the financial crisis.

Suggested Citation

  • Schmidt, Sandra & Nautz, Dieter, 2010. "Why do financial market experts misperceive future monetary policy decisions?," ZEW Discussion Papers 10-045, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:10045
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    Cited by:

    1. repec:hum:wpaper:sfb649dp2010-056 is not listed on IDEAS
    2. Vinogradov, Dmitri, 2012. "Destructive effects of constructive ambiguity in risky times," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1459-1481.
    3. repec:hum:wpaper:sfb649dp2010-061 is not listed on IDEAS
    4. repec:hum:wpaper:sfb649dp2010-037 is not listed on IDEAS
    5. Carvalho, Carlos & Nechio, Fernanda, 2014. "Do people understand monetary policy?," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 108-123.
    6. Abbassi, Puriya & Linzert, Tobias, 2012. "The effectiveness of monetary policy in steering money market rates during the financial crisis," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 945-954.
    7. repec:hum:wpaper:sfb649dp2010-059 is not listed on IDEAS
    8. repec:hum:wpaper:sfb649dp2010-055 is not listed on IDEAS
    9. repec:hum:wpaper:sfb649dp2010-054 is not listed on IDEAS
    10. Schmidt, Sandra, 2010. "Wie Finanzmarktexperten die Geldpolitik der EZB wahrnehmen," ZEW Wachstums- und Konjunkturanalysen, ZEW - Leibniz Centre for European Economic Research, vol. 13(3), pages 6-7.
    11. repec:hum:wpaper:sfb649dp2010-047 is not listed on IDEAS
    12. repec:hum:wpaper:sfb649dp2010-051 is not listed on IDEAS
    13. repec:hum:wpaper:sfb649dp2010-050 is not listed on IDEAS
    14. repec:hum:wpaper:sfb649dp2010-049 is not listed on IDEAS
    15. repec:hum:wpaper:sfb649dp2010-045 is not listed on IDEAS

    More about this item

    Keywords

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    JEL classification:

    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • 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
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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