Estimating the ECB policy reaction function

Kai Carstensen

Munich Reprints in Economics from University of Munich, Department of Economics

Abstract: This paper estimates the policy reaction function of the European Central Bank in the first four years of EMU using an ordered probit model which accounts for the fact that central bank rates are set at multiples of 25 basis points. Starting from a baseline model which mimics the Taylor rule, the impacts of different economic variables on interest rate decisions are analysed. It is concluded that the monetary growth measure which was announced by the ECB as the first pillar of their monetary strategy does not play an outstanding role for the actual interest rate decisions. More sophisticated measures like the money overhang which uses information from both pillars are better suited. Overall, it is concluded that the revision of the monetary policy strategy in May 2003 which implied a downgrading of the first pillar will not induce any observable changes in monetary policy decisions.

Date: 2006
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Published in German Economic Review 1 7(2006): pp. 1-34

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Journal Article: Estimating the ECB Policy Reaction Function (2006)
Journal Article: Estimating the ECB Policy Reaction Function (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenar:19941

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