Forecast Targeting and Financial Stability: Evidence from the European Central Bank and Bank of England

12 Pages Posted: 2 Aug 2022 Last revised: 22 Sep 2022

See all articles by Claudia Curi

Claudia Curi

Free University of Bolzano-Bozen, Faculty of Economics and Management

Lucia Milena Murgia

University of East Anglia (UEA), Norwich Business School

Date Written: Septmber 22, 2022

Abstract

This paper investigates whether financial markets stability matters in setting monetary policy in the case of the European Central Bank and Bank of England over the period 2003-2018. We show that, compared to the traditional Taylor Rule, our Tri-mandate Taylor rule better explains the deviations of the observed policy rate from the implied interest rates for both central banks. Moreover, the forward-looking version of the Tri-mandate Taylor rule shows that the monetary policy conducted by the ECB is largely affected by the US financial market stability, while only the domestic financial market stability affects the monetary policy of BOE. Lastly, we show that the preferences of monetary policy makers have shifted over time, particularly in the aftermath of the 2008 financial crisis.

Keywords: Central bank, Financial Stability, Forecast Targeting, Monetary Policy, Taylor Rule, Tri-mandate.

JEL Classification: D78, E44, E52, E58, E63, G14

Suggested Citation

Curi, Claudia and Murgia, Lucia Milena, Forecast Targeting and Financial Stability: Evidence from the European Central Bank and Bank of England (Septmber 22, 2022). Available at SSRN: https://ssrn.com/abstract=4170839 or http://dx.doi.org/10.2139/ssrn.4170839

Claudia Curi

Free University of Bolzano-Bozen, Faculty of Economics and Management ( email )

Universitätsplatz 1-Piazza Università 1
Bozen-Bolzano, Bolzano 39100
Italy
+39 0471 13498 (Phone)

Lucia Milena Murgia (Contact Author)

University of East Anglia (UEA), Norwich Business School ( email )

Norwich
United Kingdom

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