What's on the ECB's mind? - Monetary policy before and after the global financial crisis

Jonas Gross () and Johannes Zahner ()
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Jonas Gross: University of Bayreuth
Johannes Zahner: Philipps-University Marburg

MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung)

Abstract: This paper analyzes the interest rate setting of the European Central Bank (ECB) both before and after the outbreak of the global financial crisis. In the current monetary policy literature, researchers typically select one Taylor rule-based model in order to analyze the interest rate setting of central banks, but neglect uncertainty about the choice of this respective model. We apply a Bayesian model averaging (BMA) approach to extend the standard Taylor rule to account for model uncertainty driven by heterogeneity in the ECB decision-making body, the governing council. Our results suggest the following: First, the ECB acts according to its official mandate to maintain price stability and therefore to focus its decisions on the inflation rate. Second, economic activity measures have been in the focus of the ECB before the financial crisis broke out. Third, over the last decade, the role of economic activity for ECB monetary policy has decreased so that inflation seems to be the main driver of monetary policy decisions. Fourth, central bankers appear to consider more than one model when they decide about monetary policy measures.

Keywords: European Central Bank; Taylor Rule; Bayesian Model Averaging; Model Uncertainty (search for similar items in EconPapers)
JEL-codes: C11 D81 E43 E52 E58 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:mar:magkse:202008

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