The ECB Monetary Policy and the Current Financial Crisis

Lena Cleanthous and Pany Karamanou ()
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Pany Karamanou: Central Bank of Cyprus

No 2011-1, Working Papers from Central Bank of Cyprus

Abstract: Our paper presents estimates of Taylor type rules for the euro area using quarterly data for the period 2004(Q4) to 2008(Q3). Unlike other studies, we employ a real-time data set using the quarterly ECB staff projections on inflation and output growth. Estimated realtime rules are also compared with a more conventional specification whereby ex-post data are employed. Our results suggest that: (i) the ECB monetary policy strategy can be represented with a simple interest-rate rule; (ii) the ECB takes into account the quarterly ECB staff projections when deciding on its monetary policy stance; (iii) the accommodative behaviour of the ECB often cited in the literature is related to differences between real-time and ex-post data; and (iv) the estimated simple interest-rate rule continues to capture the ECB monetary policy strategy during the recent financial crisis. In light of the above, we can draw three important policy conclusions. First, the ECB has a stabilising role in the economy. Second, the ECB has become rather hawkish in its monetary policy decision making, responding more to projected changes in inflation than to projected changes in the output growth gap. Finally, the ECB’s response during the recent financial crisis of reducing its interest rate to 1.00% by the first half of 2009 and undertaking non-standard measures to provide support to the financial sector is shown to be equivalent to following a simple interest-rate rule based on its previous practices.

Keywords: Taylor type rules; ECB monetary policy; real-time data; financial crisis (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2011-01
New Economics Papers: this item is included in nep-cwa, nep-ecm and nep-mst
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Citations: View citations in EconPapers (2)

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