EUROPEAN CENTRAL BANK POLICY‐MAKING AND THE FINANCIAL CRISIS

• Author: Jakob Haan,Janko Gorter,Fauve Stolwijk,Jan Jacobs
• DOI: http://doi.org/10.1002/ijfe.1452
• Published date: 01 March 2014
• Date: 01 March 2014

EUROPEAN CENTRAL BANK POLICY-MAKING AND THE FINANCIAL

CRISIS

JANKO GORTER

a

, FAUVE STOLWIJK

a

, JAN JACOBS

b

and JAKOB DE HAAN

b,

*

†

a

De Nederlandsche Bank, Amsterdam, Netherlands

b

Faculty of Economics and Business, University of Groningen, Netherlands

ABSTRACT

We estimated Taylor rule models for the euro area using Consensus Economics forecasts of inflation and output growth for the

period 1998.6–2010.8. We first examined whether the recent financial crisis has affected European Central Bank (ECB) policies.

Our results indicate that the ECB puts stronger emphasis on maintaining price stability than the earlier point estimates suggested.

Next, we analysed whether economic developments in individual euro area countries affect ECB decisions. Despite the diverging

economic developments in the countries in the euro area, notably during the recent financial crisis, we did not find support for the

view that policy decisions have been influenced by regional developments. Copyright © 2012 John Wiley & Sons, Ltd.

Received 14 December 2010; Accepted 03 February 2012

JEL CODE: C22; E52

KEY WORDS: Taylor rule; ECB; regional influence; real-time data

1. INTRODUCTION

This article reexamines policy-making by the European Central Bank (ECB) addressing two questions: (i) Has the

recent financial crisis affected the relative importance of inflation and real developments in determining policy

rates? (ii) Do economic developments in individual countries in the euro area affect ECB policy-making?

In addressing these issues, we updated estimates of a Taylor rule model as reported by Gorter et al. (2008). The

Taylor rule seems a reasonable description of central bank behaviour. However, as Svensson (2003) have shown,

even if the ultimate objective of monetary policy is to stabilize inflation and output, a simple Taylor rule will not be

optimal in a reasonable macroeconomic model. Interest rate changes affect inflation and output with a sizable lag.

Therefore, monetary policy has to be forward-looking, that is, it should be based on expected inflation and output.

To capture this, we employed forecasts of inflation and output from Consensus Economics for estimating our

Taylor rule model for the ECB. The Consensus data are unique, not revised, and, consequently, not subject to

the critique of Orphanides (2001).

1

We employed the model specification of English et al. (2003) that combines

the partial adjustment Taylor rule model (Clarida et al., 1998) and the Taylor rule model with serial correlation

(Rudebusch, 2002) to obtain a nested model.

As to the first research question, the recent financial crisis has been the most severe crisis in industrial countries

since the Great Depression. Central banks reduced policy rates to historically low levels and even had to take

recourse to unconventional measures to get their economies back on track. It seemed that inflation was no longer

the main driver of monetary policy-making. Although less aggressive perhaps than the Federal Reserve, the ECB

*Correspondence to: Jakob de Haan, Faculty of Economicsand Business, Universityof Groningen,PO Box 800, Groningen 9700 AV, Netherlands

†

E-mail: jakob.de.haan@rug.nl

1

Orphanides (2001) has shown that the use of real-time instead of ex-post data leads to very different estimated coefficients in Taylor rule models

for the Federal Reserve.

Copyright © 2012 John Wiley & Sons, Ltd.

INTERNATIONAL JOURNAL OF FINANCE AND ECONOMICS

Int. J. Fin. Econ. 19: 132–139 (2014)

Published online 7 March 2012 in Wiley Online Library

(wileyonlinelibrary.com). DOI: 10.1002/ijfe.1452