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Out of the ELB: Expected ECB policy rates and the Taylor rule

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  • Bernardini, Marco
  • Lin, Alessandro

Abstract

We compare the path of the ECB policy rate (deposit facility rate) expected by financial market analysts with simple monetary policy rules based on their own expectations regarding inflation and economic activity. To this end, we adopt a thick-modelling approach to account for uncertainty surrounding the exact parametrization of the rule according to analysts. We show that, since the ECB monetary policy moved away from the effective lower bound (ELB) and stopped providing explicit forward guidance on the future path of the policy rate, policy rate expectations have become largely aligned with those implied by the rules.

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  • Bernardini, Marco & Lin, Alessandro, 2024. "Out of the ELB: Expected ECB policy rates and the Taylor rule," Economics Letters, Elsevier, vol. 235(C).
    • Handle: RePEc:eee:ecolet:v:235:y:2024:i:c:s0165176524000302
    DOI: 10.1016/j.econlet.2024.111546
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    1. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14, National Bureau of Economic Research, Inc.
    2. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348, National Bureau of Economic Research, Inc.
    3. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
    4. Brand, Claus & Hutchinson, John, 2022. "The ECB survey of Monetary Analysts: an introduction," Economic Bulletin Articles, European Central Bank, vol. 8.
    5. Michael Woodford, 2003. "Optimal Interest-Rate Smoothing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(4), pages 861-886.
    6. Orphanides, Athanasios, 2003. "Historical monetary policy analysis and the Taylor rule," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 983-1022, July.
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    Cited by:

    1. Camilla Lupiani, 2024. "Taylor Rule and Shadow Rates: theory and empirical analysis," BAFFI CAREFIN Working Papers 24218, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    2. Marco Bernardini & Lara D'Arrigo & Alessandro Lin & Andrea Tiseno, 2024. "Real interest rates and the ECB's monetary policy stance," Questioni di Economia e Finanza (Occasional Papers) 857, Bank of Italy, Economic Research and International Relations Area.
    3. Margherita Bottero & Antonio M. Conti, 2023. "In the thick of it: an interim assessment of monetary policy transmission to credit conditions," Questioni di Economia e Finanza (Occasional Papers) 810, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    Monetary policy rules; Expectations; ECB survey of monetary analysts; Effective lower bound;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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