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What's on the ECB's mind? - Monetary policy before and after the global financial crisis

Author

Listed:
  • Jonas Gross

    (University of Bayreuth)

  • Johannes Zahner

    (Philipps-University Marburg)

Abstract
This paper analyzes the interest rate setting of the European Central Bank (ECB) both before and after the outbreak of the global financial crisis. In the current monetary policy literature, researchers typically select one Taylor rule-based model in order to analyze the interest rate setting of central banks, but neglect uncertainty about the choice of this respective model. We apply a Bayesian model averaging (BMA) approach to extend the standard Taylor rule to account for model uncertainty driven by heterogeneity in the ECB decision-making body, the governing council. Our results suggest the following: First, the ECB acts according to its official mandate to maintain price stability and therefore to focus its decisions on the inflation rate. Second, economic activity measures have been in the focus of the ECB before the financial crisis broke out. Third, over the last decade, the role of economic activity for ECB monetary policy has decreased so that inflation seems to be the main driver of monetary policy decisions. Fourth, central bankers appear to consider more than one model when they decide about monetary policy measures.

Suggested Citation

  • Jonas Gross & Johannes Zahner, 2020. "What's on the ECB's mind? - Monetary policy before and after the global financial crisis," MAGKS Papers on Economics 202008, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    • Handle: RePEc:mar:magkse:202008
    as

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    File URL: http://www.uni-marburg.de/fb02/makro/forschung/magkspapers/paper_2020/08-2020_zahner.pdf
    File Function: First 202008
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    European Central Bank; Taylor Rule; Bayesian Model Averaging; Model Uncertainty;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • 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

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