Interest Rate Setting by the ECB, 1999-2006: Words and Deeds
by Stefan Gerlach
Institute for Monetary and Financial Stability
Johann Wolfgang Goethe University, Frankfurt am Main
We estimate empirical reaction functions for the European
Central Bank (ECB) with ordered-probit techniques, using the
ECB's Monthly Bulletin to guide the choice of variables. The
results show that policy reacts to the state of the real economy,
M3 growth, and exchange rate changes but not to inflation.
We develop quantitative indicators of the Governing Council's
assessment of economic conditions to understand its interest
rate decisions and argue that the ECB has not reacted to inflation
shocks because they were seen as temporary. By contrast,
policy responses to economic activity are strong because it
impacts on the outlook for inflation.
JEL Codes: E43, E52, E58.
(PDF, 46 pages 430 kb)