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Reakční funkce Evropské centrální banky
[The Reaction Function of the European Central Bank]

Author

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  • Ondřej Čížek

Abstract

The forecast-based reaction function of the European Central Bank (ECB) is estimated in this paper and the change in the monetary policy regime is discussed in the context of the current economic crisis. ECB/Eurosystem staff projections database is utilized in order to estimate the rule. The advantage of using this database is demonstrated by comparing the results of econometric estimation utilizing these data on projections with the results obtained by popular method of using future values as proxies for expectations. This popular method is shown to be inadequate in this paper not only by econometric verification of alternative forms of the estimated reaction function. Its inadequacy is demonstrated also by analyzing statistical properties of the time series and by showing that standard econometric assumptions do not hold when using future values as proxies for expectations. It is further shown that current values are more suitable proxies for expectations than values actually observed in the future. This fact provides an answer to the question analyzed recently by Arlt, Mandel (2012), (2014) who investigated how is it possible that simple backward-looking rules perform extremely well when describing forward-looking behavior of central banks.

Suggested Citation

  • Ondřej Čížek, 2017. "Reakční funkce Evropské centrální banky [The Reaction Function of the European Central Bank]," Politická ekonomie, Prague University of Economics and Business, vol. 2017(4), pages 424-439.
    • Handle: RePEc:prg:jnlpol:v:2017:y:2017:i:4:id:1153:p:424-439
    DOI: 10.18267/j.polek.1153
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    References listed on IDEAS

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    1. Jing Cynthia Wu & Fan Dora Xia, 2016. "Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(2-3), pages 253-291, March.
    2. Orphanides, Athanasios, 2003. "Historical monetary policy analysis and the Taylor rule," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 983-1022, July.
    3. Filip Novotný & Marie Raková, 2011. "Assessment of Consensus Forecasts Accuracy: The Czech National Bank Perspective," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 61(4), pages 348-366, August.
    4. Yash P. Mehra, 1999. "A forward-looking monetary policy reaction function," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 33-54.
    5. Jaromír Kukal & Tran Van Quang, 2011. "Modelování měnově politické úrokové míry ČNB neuronovými sítěmi [Modeling the CNB's Monetary Policy Interest Rate by Artificial Neural Networks]," Politická ekonomie, Prague University of Economics and Business, vol. 2011(6), pages 810-829.
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    More about this item

    Keywords

    monetary policy; reaction function; backward-looking; forward-looking; forecast-based; rational expectations; shadow rate;
    All these keywords.

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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