ECB Reaction Functions and the Crisis of 2008
Stefan Gerlacha and John Lewisb
We estimate a reaction function for the European Central
Bank (ECB) using forecasts of economic growth and inflation
as regressors. We detect a shift after Lehman Brothers failed in
September 2008 when the pre-crisis reaction function indicates
that the zero lower bound may become a constraint. We detect
a shift back in the second half of 2010, several months prior
to the April 2011 rate increase. The interest rate cuts in 2008
were more aggressive than forecast by the pre-crisis reaction
function. These findings are compatible with the literature on
optimal monetary policy in the presence of a zero lower bound.
JEL Codes: C2, E52.
Full article (PDF, 21 pages, 409 kb)
a Central Bank of Ireland and CEPR
b Economics and Research Division, De Nederlandsche Bank