Country shocks, monetary policy expectations and ECB decisions. A dynamic non-linear approach

Maximo Camacho, Danilo Leiva-Leon () and Gabriel Perez-Quiros ()
Additional contact information
Gabriel Perez-Quiros: Banco de España, Airef and CEPR
Authors registered in the RePEc Author Service: Gabriel Perez Quiros

No 1523, Working Papers from Banco de España

Abstract: Previous studies have shown that the effectiveness of monetary policy largely depends on market expectations about future policy 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 about the ECB’s monetary policy in two stages. In the first stage, we construct indices of real activity and inflation dynamics for each country, based on soft and hard indicators. In the second stage, we use those indices to provide assessments of 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. In particular, contractionary demand shocks have a negative effect on short-term monetary policy expectations, while contractionary supply shocks have a negative effect on medium and long-term expectations. Moreover, shocks to different economies do not have significantly different effects on expectations, although some cross-country differences arise.

Keywords: business cycles; inflation cycles; monetary policy (search for similar items in EconPapers)
JEL-codes: C22 E27 E32 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2015-09
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.bde.es/f/webbde/SES/Secciones/Publicaci ... /15/Fich/dt1523e.pdf First version, September 2015 (application/pdf)

Related works:
Chapter: Country Shocks, Monetary Policy Expectations and ECB Decisions. A Dynamic Non-linear Approach (2016)
Working Paper: Country Shocks, Monetary Policy Expectations and ECB Decisions. A Dynamic Non-Linear Approach (2015)
Working Paper: Country shocks, monetary policy expectations and ECB decisions. A dynamic non-linear approach (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1523

Access Statistics for this paper

More papers in Working Papers from Banco de España Contact information at EDIRC.
Bibliographic data for series maintained by Ángel Rodríguez. Electronic Dissemination of Information Unit. Research Department. Banco de España ().