Forecast Targeting and Financial Stability: Evidence from the European Central Bank and Bank of England

Claudia Curi and Lucia Milena Murgia

Finance Research Letters, 2023, vol. 51, issue C

Abstract: This paper investigates whether financial markets stability matters in setting monetary policy in the case of the European Central Bank and Bank of England. We show that our Tri-mandate Taylor rule better explains the deviations of the observed policy rate from the implied interest rates for both central banks. The forward-looking version shows that the monetary policy conducted by the ECB is largely affected by the US financial market stability, while only the domestic financial market stability affects the BOE. Lastly, we show that the preferences of monetary policy makers have shifted in the aftermath of the 2008 financial crisis.

Keywords: Central bank; Financial Stability; Forecast Targeting; Monetary Policy; Taylor Rule; Tri-mandate (search for similar items in EconPapers)
JEL-codes: D78 E44 E52 E58 E63 G14 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:51:y:2023:i:c:s1544612322006626

DOI: 10.1016/j.frl.2022.103486

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