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
Date Written: Septmber 22, 2022
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: Suggested Citation