Country Shocks, Monetary Policy Expectations and ECB Decisions. A Dynamic Non-Linear Approach

39 Pages Posted: 21 Sep 2015

See all articles by Maximo Camacho

Maximo Camacho

Autonomous University of Barcelona - Department of Economics; Universidad de Murcia - Departamento de Metodos Cuantitativos

Danilo Leiva-Leon

Central Bank of Chile

Gabriel Pérez-Quirós

Banco de España

Multiple version iconThere are 2 versions of this paper

Date Written: September 2015

Abstract

Previous studies have shown that the effectiveness of monetary policy depends, to a large extent, on the market expectations of its future actions. This paper proposes an econometric framework to address the effect of the current state of the economy on monetary policy expectations. Specifically, we study the effect of contractionary (or expansionary) demand (or supply) shocks hitting the euro area countries on the expectations of the ECB’s monetary policy in two stages. In the first stage, we construct indexes of real activity and inflation dynamics for each country, based on soft and hard indicators. In the second stage, we use those indexes to provide assessments on the type of aggregate shock hitting each country and assess its effect on monetary policy expectations at different horizons. Our results indicate that expectations are responsive to aggregate contractionary shocks, but not to expansionary shocks. Particularly, contractionary demand shocks have a negative effect on short term monetary policy expectations, while contractionary supply shocks have negative effect on medium and long term expectations. Moreover, shocks to different economies do not have significantly different effects on expectations, although some differences across countries arise.

Keywords: business cycles, inflation cycles, monetary policy

JEL Classification: C22, E32, E37

Suggested Citation

Camacho, Maximo and Leiva-Leon, Danilo and Pérez-Quirós, Gabriel, Country Shocks, Monetary Policy Expectations and ECB Decisions. A Dynamic Non-Linear Approach (September 2015). CEPR Discussion Paper No. DP10828, Available at SSRN: https://ssrn.com/abstract=2663406

Maximo Camacho (Contact Author)

Autonomous University of Barcelona - Department of Economics ( email )

Avda. Diagonal 690
Barcelona, 08034
Spain

Universidad de Murcia - Departamento de Metodos Cuantitativos ( email )

Campus de Espinardo
30100 Murcia
Spain
+34 968 367 982 (Phone)

Danilo Leiva-Leon

Central Bank of Chile ( email )

Research Department
Huerfanos 1185
Santiago
Chile

Gabriel Pérez-Quirós

Banco de España

Alcala 50
Madrid 28014
Spain

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