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Why Do Financial Market Experts Misperceive Future Monetary Policy Decisions?

Sandra Schmidt and Dieter Nautz ()

No SFB649DP2010-036, SFB 649 Discussion Papers from Humboldt University, Collaborative Research Center 649

Abstract: This paper investigates why financial market experts misperceive the interest rate policy of the European Central Bank (ECB). Assuming a Taylor-rule-type reaction function of the ECB, we use qualitative survey data on expectations about the future interest rate, inflation, and output to discover the sources of in- dividual interest rate forecast errors. Based on a panel random coefficient model, we show that financial experts have systematically misperceived the ECB's in- terest rate rule. However, although experts tend to overestimate the impact of inflation on future interest rates, perceptions of monetary policy have become more accurate since clarification of the ECB's monetary policy strategy in May 2003. We find that this improved communication has reduced disagreement over the ECB's response to expected inflation during the financial crisis.

Keywords: Central bank communication; Interest rate forecasts; Survey expectations; Panel random coefficient model (search for similar items in EconPapers)
JEL-codes: E47 E52 E58 C23 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2010-07
New Economics Papers: this item is included in nep-cba, nep-eec, nep-fmk, nep-for, nep-mac and nep-mon
References: View complete reference list from CitEc
Citations: View citations in EconPapers (16) Track citations by RSS feed

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