ECB Reaction Functions and the Crisis of 2008
33 Pages Posted: 20 Jul 2011
Date Written: July 2011
Abstract
We study ECBs interest rate setting in 1999-2010 using a reaction function in which forecasts of future economic growth and inflation enter as regressors. Allowing for a gradual switch between two reaction functions, we detect a shift after Lehman Brothers failed in September 2008 when the pre-crisis reaction function first indicates that interest rates may become constrained by the zero lower bound. Furthermore, the interest rate cuts in late 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.
Keywords: ECB, reaction functions, smooth transition, zero lower bound
JEL Classification: C2, E52
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Are U.K. Inflation Expectations Rational?
By Hasan Bakhshi and Anthony Yates
-
Monetary Policy Transmission Mechanism in Poland - What Do We Know in 2011?
By Tomasz Lyziak, Oksana Demchuk, ...
-
Consumer Inflation Expectations: Survey Questions and Quantification Methods - the Case of Poland
By Ewa Stanislawska and Tomasz Lyziak
-
Nonparametric Hybrid Phillips Curves Based on Subjective Expectations: Estimates for the Euro Area
-
Testing Rationality of Price Expectations on the Basis of Contingency Tables