Out of the ELB: expected ECB policy rates and the Taylor rule

Marco Bernardini and Alessandro Lin

No 815, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We compare the path of the ECB policy rate (deposit facility rate) expected by financial market analysts with simple monetary policy rules based on their own expectations regarding inflation and the economic activity. To this end, we adopt a thick-modelling approach to account for uncertainty surrounding the exact parametrization of the rule according to analysts. We show that, since the ECB monetary policy moved away from the effective lower bound (ELB) and stopped providing explicit forward guidance on the future path of the policy rate, policy rate expectations have become largely aligned with those implied by the rules. We also document three additional findings. First, growing perceptions of downward demand-side risks since spring 2023 have been associated with an adjustment of analysts’ rate expectations to slightly-below rule-implied rates. Second, the significant and continuous upward revisions of expected ECB rates observed during the 2022-23 rate hiking cycle have mainly resulted from upward revisions of expected inflation and expectations of a higher long-run policy rate. Third, analysts’ rate expectations appear to be shaped more by expectations regarding core inflation rather than those of headline inflation.

Keywords: monetary policy rules; expectations; ECB's survey of monetary analysts; effective lower bound. (search for similar items in EconPapers)
JEL-codes: E40 E52 (search for similar items in EconPapers)
Date: 2023-10
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Out of the ELB: Expected ECB policy rates and the Taylor rule (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:opques:qef_815_23

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