Establishing Credibility: Evolving Perceptions of the European Central Bank

30 Pages Posted: 13 Dec 2006 Last revised: 22 Sep 2010

See all articles by Linda S. Goldberg

Linda S. Goldberg

Federal Reserve Bank of New York; National Bureau of Economic Research (NBER)

Michael W. Klein

Tufts University - The Fletcher School of Law and Diplomacy; National Bureau of Economic Research (NBER)

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Date Written: November 2005

Abstract

The perceptions of a central bank's inflation aversion may reflect institutional structure or, more dynamically, the history of its policy decisions. In this paper, we present a novel empirical framework that uses high frequency data to test for persistent variation in market perceptions of central bank inflation aversion. The first years of the European Central Bank (ECB) provide a natural experiment for this model. Tests of the effect of news announcements on the slope of yield curves in the euro-area, and on the euro/dollar exchange rate, suggest that the market's perception of the policy stance of the ECB during its first six years of operation significantly evolved, with a belief in its inflation aversion increasing in the wake of its monetary tightening. In contrast, tests based on the response of the slope of the United States yield curve to news offer no comparable evidence of any change in market perceptions of the inflation aversion of the Federal Reserve.

Suggested Citation

Goldberg, Linda S. and Klein, Michael W., Establishing Credibility: Evolving Perceptions of the European Central Bank (November 2005). NBER Working Paper No. w11792. Available at SSRN: https://ssrn.com/abstract=851701

Linda S. Goldberg (Contact Author)

Federal Reserve Bank of New York ( email )

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Michael W. Klein

Tufts University - The Fletcher School of Law and Diplomacy ( email )

Medford, MA 02155
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617-627-3712 (Fax)

National Bureau of Economic Research (NBER)

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