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ECB Monetary Policy Consistency and Interbank Interest Rates Forecasts

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  • GIOVANNI VERGA

    (University of Parma)

Abstract

The European Central Bank has often declared that it has two main monetary policy tools: the official interest rate (Repo) and its communications to the public (the monthly President’s Conferences above all). In this paper an ECB’s reaction function formed by a system of two non-linear equations is employed to explain both ECB’s Repo and communications, and to verify if the two policy instruments are used consistently. It turned out that the estimated system is particularly robust, and the consistently is proved. During the financial crisis, however, also an index of monetary market risk must enter the equations in order to maintain the other parameters stable. By employing those two monetary policy tools as regressors, along with risk and liquidity, a good deal of the future changes in the interbank interest rates can be explained. During the crisis such forecasts are much better than those obtained by applying the usual term structure theory.

Suggested Citation

  • Giovanni Verga, 2011. "ECB Monetary Policy Consistency and Interbank Interest Rates Forecasts," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 1, pages 17-28, March.
    • Handle: RePEc:cbu:jrnlec:y:2011:v:1:p:17-28
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    References listed on IDEAS

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