Working Paper: CEPR ID: DP4775
Authors: Stefan Gerlach
Abstract: This Paper discusses interest rate setting by the ECB between 1999 and 2004. I develop from the Monthly Bulletins quantitative indicators of the Governing Council?s assessment of inflation, economic activity, and M3 growth, and investigate their impact on its interest rate decisions. I also estimate reaction functions with ordered probit techniques, using the Monthly Bulletins to guide the choice of variables for the analysis. The results show that the ECB reacts strongly to economic sentiment indicators as measures of the state of the real economy. Furthermore, I find statistically significant reactions to inflation and M3 growth.
Keywords: ECB; Empirical Reaction Functions; Ordered Probit
JEL Codes: E43; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Economic sentiment indicators (E66) | ECB interest rate decisions (E52) |
| Inflation rates (E31) | ECB interest rate decisions (E52) |
| M3 growth (O42) | ECB interest rate decisions (E52) |