Market perceptions, monetary policy, and credibility

Vincenzo Cuciniello

No 1449, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper presents novel time-varying estimates of the monetary policy rule as perceived by financial markets, focusing on days of heightened inflation-linked swap rate volatility corresponding to preliminary inflation release dates in the euro area. My findings reveal significant fluctuations in the perceived responsiveness of monetary policy to inflation, reflecting shifts in the ECB's concerns regarding price stability risks. Moreover, the sensitivity of this perceived responsiveness to monetary shocks varies based on prevailing inflation expectations, with tighter policy having a greater impact in high-inflation environments. Lastly, a stronger perceived monetary policy response to inflation enhances policy credibility by dampening the sensitivity of long-term inflation expectations to short-term fluctuations.

Keywords: European Central Bank; monetary policy rule; credibility; financial market expectations; macroeconomic data releases (search for similar items in EconPapers)
JEL-codes: C10 E50 G10 (search for similar items in EconPapers)
Date: 2024-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-ifn and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1449_24

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