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Interest rate setting and communication at the ECB

Author

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  • Cour-Thimann, Philippine
  • Jung, Alexander
Abstract
Based on ordered Probit models and twenty years of euro area data, we estimate empirical reaction functions for the ECB´s monetary policy and augment them with communication indicators. First, we find that the ECB responded to risks to price stability in line with its primary objective, and that the account of post-meeting communications about risks to price stability and to growth significantly enhances the modelling of its reaction function. Second, we detect that the ECB also responded to the evolution of the federal funds rate, thereby confirming the importance of international interest rate linkages or the global cycle that it reflects. Third, while confirming Gerlach’s (2007) finding on the relevance of M3 growth for explaining future interest rate changes, we show that this result only holds for the period before the global financial crisis. JEL Classification: E43, E52, C22, C25

Suggested Citation

  • Cour-Thimann, Philippine & Jung, Alexander, 2020. "Interest rate setting and communication at the ECB," Working Paper Series 2443, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20202443
    Note: 339030
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2443~0c2a084f5b.en.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    communication indicators; monetary policy reaction function; Probit model; staff projections; Survey of Professional Forecasters;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities

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