Working Paper: CEPR ID: DP7933
Authors: Stefan Gerlach; John Lewis
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.
Keywords: ECB; reaction function; smooth transition; zero lower bound
JEL Codes: C2; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ECB's monetary policy reaction function shifted (E52) | interest rates were cut more aggressively (E43) |
| falling GDP growth (E20) | ECB reacted by lowering interest rates more rapidly (E52) |
| real GDP growth fell to approximately 1.4% (F62) | ECB's shift in interest rate policy (E52) |
| concerns over reaching the zero lower bound (E52) | more aggressive monetary policy response (E63) |
| deteriorating economic conditions (E66) | rapid response by ECB to cut rates (E52) |