Why do financial market experts misperceive future monetary policy decisions?

Sandra Schmidt and Dieter Nautz

No 10-045, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

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 individual interest rate forecast errors. Based on a panel random coefficient model, we show that financial experts have systematically misperceived the ECB's interest 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: C23 E47 E52 E58 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-cba, nep-eec, nep-for, nep-mac and nep-mon
References: View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Working Paper: Why do financial market experts misperceive future monetary policy decisions? (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:10045

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