The ECB interest rate rule under the Duisenberg presidency

Fourçans, André; Vranceanu, Radu

doi:10.1016/j.ejpoleco.2004.01.003

Cited by 51 publications

(26 citation statements)

References 20 publications

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“…The high degree of interest rate smoothing reported in other studies (e.g. Fourçans and Vranceanu 2004) is apparent in these equations, too. The lagged change of the target interest rate has the largest effect on the probabilities.…”

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confidence: 48%

Does it Pay to Watch Central Bankers' Lips? The Information Content of Ecb Wording

Heinemann

Ullrich

2005

SSRN Journal

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Die Discussion Papers dienen einer möglichst schnellen Verbreitung von neueren Forschungsarbeiten des ZEW. Die Beiträge liegen in alleiniger Verantwortung der Autoren und stellen nicht notwendigerweise die Meinung des ZEW dar.Discussion Papers are intended to make results of ZEW research promptly available to other economists in order to encourage discussion and suggestions for revisions. The authors are solely responsible for the contents which do not necessarily represent the opinion of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp0570.pdf In the empirical analysis, we employ a monetary reaction function extended by the wording indicator. Our results indicate that the decoding of rhetoric signals is useful because wording includes information helpful to improve the explanation of interest rate decision based on standard explanatory models. This result is confirmed on the basis of out of sample analysis where the period on which the wording indicator's choice of weights is based is not included in testing this indicator's significance. We conclude that ECB wording has an information content which cannot fully be replicated by Taylor type regressions. But simple decoding of central bankers' messages cannot substitute a more thorough analysis of economic data. Our findings indicate that judgements based solely on analysing central bankers' speeches are inferior to more refined approaches based on models and economic data. Non-Technical Summary Does it Pay to Watch Central Bankers' Lips? The Information Content of ECB WordingFriedrich Heinemann and Katrin Ullrich Centre for European Economic Research (ZEW), Mannheim Revised version September 2005 AbstractIn this analysis, the informational content of central bank rhetoric is assessed based on the experience with the ECB since 1999. Among the ECB's communication channels we focus on the monthly press conferences. Based on a counting of certain signal words we construct a wording indicator reflecting the "hawkishness" of monetary rhetorics. For the construction, we develop an objective algorithm representing a learning process of ECB observers. We then integrate this indicator into a standard Taylor type ordered probit model for the explanation of the interest rate. We show that the wording indicator can improve the model's fit when added to the standard explanatory variables. However, a model based solely on this indicator performs worse than the baseline. The results are confirmed by out of sample analysis where the determination of the wording indicators' weights is based on the early ECB period which, subsequently, is excluded from the tests. Our conclusion is that linguistic analysis can improve but not substitute more rigorous forecasting techniques based on hard economic data.

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confidence: 48%

Does it Pay to Watch Central Bankers' Lips? The Information Content of Ecb Wording

Heinemann

Ullrich

2005

SSRN Journal

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“…For example, Fourçans and Vranceanu (2004) present some evidence of an ECB response to the exchange rate deviations from its average. A similar result is found by Chadha et al (2004) for the Fed, Bank of England and Bank of Japan and by Lubik and Schorfheide (2007) for the central banks of Canada and England.…”

Section: A Brief Review Of the Literature On The Taylor Rulementioning

confidence: 99%

“…3 They prove its advantages in the analysis of the policy behaviour of the Fed and other influential central banks. Fourçans and Vranceanu (2004) and Sauer and Sturm (2007) also stress the importance of considering a forward-looking Taylor rule in the analysis of the ECB monetary policy.…”

Section: A Brief Review Of the Literature On The Taylor Rulementioning

confidence: 99%

Are Central Banks Following a Linear or Nonlinear (Augmented) Taylor Rule?

Castro

2008

SSRN Journal

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The Taylor rule establishes a simple linear relation between the interest rate, inflation and output gap. However, this relation may not be so simple. To get a deeper understanding of central banks' behaviour, this paper asks whether central banks are In particular, those two central banks tend to react to inflation only when inflation is above or outside their targets. Moreover, our evidence suggests that the European Central Bank is targeting financial conditions, contrary to the other two central banks.This lack of attention to the financial conditions might have made the United States and the United Kingdom more vulnerable to the recent credit crunch than the Eurozone.

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“…Accordingly, most researchers study the ECB's monetary policy by estimating interest-rate reaction functions or Taylor rules, relating the economic situation of the euro area to observed interest rates. A number of studies estimate such an aggregate reaction function for the euro area (Gerlach and Schnabel, 2000, Mihov, 2001, Doménech et al, 2002, Fourçans and Vranceanu, 2004, Gerdesmeier and Roffia, 2004, Clausen and Hayo, 2005, Hayo and Hofmann, 2006, Gerlach, 2007. These studies differ substantially in terms of theoretical assumptions, empirical implementation, and, perhaps unsurprisingly, results.…”

Section: Similar Differences Have Been Documented For the Federal Resmentioning

confidence: 99%

Behind closed doors: Revealing the ECB's decision rule

Hayo

Méon

2013

Journal of International Money and Finance

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This paper aims at discovering the decision rule the Governing Council of the ECB uses to set interest rates. We construct a Taylor rule for each member of the council and for the euro area as a whole, and aggregate the interest rates they produce using several classes of decision-making mechanisms: chairman dominance, bargaining, consensus, voting, and voting with a chairman. We test alternative scenarios in which individual members of the council pursue either a national or a federal objective. We then compare the interest-rate path predicted by each scenario with the observed euro area's interest rate. We find that scenarios in which all members of the Governing Council are assumed to pursue Euro-area-wide objectives are dominated by scenarios in which decisions are made collectively by a council consisting of members pursuing national objectives. The best-performing scenario is the one in which individual members of the Governing Council follow national objectives, bargain over the interest rate, and their weights are based on their country's share of the zone's GDP. Behind closed doors: Revealing the ECB's Decision RuleAbstract: This paper aims at discovering the decision rule the Governing Council of the ECB uses to set interest rates. We construct a Taylor rule for each member of the council and for the euro area as a whole, and aggregate the interest rates they produce using several classes of decision-making mechanisms: chairman dominance, bargaining, consensus, voting, and voting with a chairman. We test alternative scenarios in which individual members of the council pursue either a national or a federal objective. We then compare the interest-rate path predicted by each scenario with the observed euro area's interest rate. We find that scenarios in which all members of the Governing Council are assumed to pursue Euro-area-wide objectives are dominated by scenarios in which decisions are made collectively by a council consisting of members pursuing national objectives. The best-performing scenario is the one in which individual members of the Governing Council follow national objectives, bargain over the interest rate, and their weights are based on their country's share of the zone's GDP.

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The ECB interest rate rule under the Duisenberg presidency

Cited by 51 publications

References 20 publications

Does it Pay to Watch Central Bankers' Lips? The Information Content of Ecb Wording

Does it Pay to Watch Central Bankers' Lips? The Information Content of Ecb Wording

Are Central Banks Following a Linear or Nonlinear (Augmented) Taylor Rule?

Behind closed doors: Revealing the ECB's decision rule

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