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The Zero Lower Bound, ECB Interest Rate Policy and the Financial Crisis

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  • Gerlach, Stefan
  • Lewis, John

Abstract

This paper estimates a monetary policy reaction function for the ECB over the period 1999-2009. To allow for a potential shift in interest rate setting during the financial crisis, we permit a smooth transition from one set of parameters to another. The estimates show a swift change in the months following the collapse of Lehman brothers. They suggest that the ECB cut rates more aggressively than expected solely on the basis of the worsening of macroeconomic conditions, consistent with the theoretical literature on optimal monetary policy in the vicinity of the zero bound.

Suggested Citation

  • Gerlach, Stefan & Lewis, John, 2010. "The Zero Lower Bound, ECB Interest Rate Policy and the Financial Crisis," CEPR Discussion Papers 7933, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7933
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Ecb; Reaction function; Smooth transition; Zero lower bound;
    All these keywords.

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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