Interest Rate Setting by the ECB, 1999-2006: Words and Deeds

Stefan Gerlach

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Monetary Policy and Economic Impact Global Financial Crisis and Policies European Monetary and Fiscal Policies

Abstract

This Paper discusses interest rate setting by the ECB between 1999 and 2004. I develop from the Monthly Bulletins quantitative indicators of the Governing Council’s assessment of inflation, economic activity, and M3 growth, and investigate their impact on its interest rate decisions. I also estimate reaction functions with ordered probit techniques, using the Monthly Bulletins to guide the choice of variables for the analysis. The results show that the ECB reacts strongly to economic sentiment indicators as measures of the state of the real economy. Furthermore, I find statistically significant reactions to inflation and M3 growth.

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References

1993Discretion versus policy rules in practice 1986The theory and practice of econometrics 2003An Area Wide Model (Awm) for the Euro Area 2001Shifting endpoints in the term structure of interest rates 1997Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets 2000The Taylor rule and interest rates in the EMU area 1999The Taylor Rule: A Useful Monetary Policy Benchmark for the Euro Area?2003Empirical Estimates of Reaction Functions for the Euro Area

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2008Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence 2010Does central bank communication really lead to better forecasts of policy decisions? New evidence based on a Taylor rule model for the ECB 2008Taylor Rules for the ECB using Expectations Data*2010Do Federal Reserve communications help predict federal funds target rate decisions?2006The timing of central bank communication 2007Does it Pay to Watch Central Bankers’ Lips? The Information Content of ECB Wording

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