Interest rate setting at the ECB: Individual preferences and collective decision making

Cancelo, José Ramón; Varela, Diego; Santos, José Manuel Sánchez

doi:10.1016/j.jpolmod.2011.08.017

Cited by 8 publications

(7 citation statements)

References 19 publications

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“…Therefore, their analysis does not tell us anything about the status quo of decision making in the Governing Council but instead analyses what its policy would look like if the ECB used the rotation system. Finally, Cancelo et al (2011) use a similar methodology and distinguish between different types of 6 preferences, but consider only a limited set of decision rules and model selection criteria.…”

Section: Similar Differences Have Been Documented For the Federal Resmentioning

confidence: 99%

“…In terms of research question and methodology, our paper is closest to the study by Cancelo et al (2011). The idea is to estimate national Taylor rules using historical data so as to produce counterfactual national interest-rate paths and an interest-rate path that would be followed by a policymaker concerned only with the euro area.…”

Section: Similar Differences Have Been Documented For the Federal Resmentioning

confidence: 99%

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Behind closed doors: Revealing the ECB's decision rule

Hayo

Méon

2013

Journal of International Money and Finance

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This paper aims at discovering the decision rule the Governing Council of the ECB uses to set interest rates. We construct a Taylor rule for each member of the council and for the euro area as a whole, and aggregate the interest rates they produce using several classes of decision-making mechanisms: chairman dominance, bargaining, consensus, voting, and voting with a chairman. We test alternative scenarios in which individual members of the council pursue either a national or a federal objective. We then compare the interest-rate path predicted by each scenario with the observed euro area's interest rate. We find that scenarios in which all members of the Governing Council are assumed to pursue Euro-area-wide objectives are dominated by scenarios in which decisions are made collectively by a council consisting of members pursuing national objectives. The best-performing scenario is the one in which individual members of the Governing Council follow national objectives, bargain over the interest rate, and their weights are based on their country's share of the zone's GDP. Behind closed doors: Revealing the ECB's Decision RuleAbstract: This paper aims at discovering the decision rule the Governing Council of the ECB uses to set interest rates. We construct a Taylor rule for each member of the council and for the euro area as a whole, and aggregate the interest rates they produce using several classes of decision-making mechanisms: chairman dominance, bargaining, consensus, voting, and voting with a chairman. We test alternative scenarios in which individual members of the council pursue either a national or a federal objective. We then compare the interest-rate path predicted by each scenario with the observed euro area's interest rate. We find that scenarios in which all members of the Governing Council are assumed to pursue Euro-area-wide objectives are dominated by scenarios in which decisions are made collectively by a council consisting of members pursuing national objectives. The best-performing scenario is the one in which individual members of the Governing Council follow national objectives, bargain over the interest rate, and their weights are based on their country's share of the zone's GDP.

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Section: Similar Differences Have Been Documented For the Federal Resmentioning

confidence: 99%

Section: Similar Differences Have Been Documented For the Federal Resmentioning

confidence: 99%

Behind closed doors: Revealing the ECB's decision rule

Hayo

Méon

2013

Journal of International Money and Finance

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“…Table 1 sets out descriptive statistics for the communication indicator. 10 A couple of things are worth highlighting. First, speeches contain, on average, more hawkish words than dovish ones as the mean is positive throughout all groups.…”

Section: Data and Empirical Methodology 21 Measuring The Tone Of Spementioning

confidence: 99%

The (home) bias of European central bankers: new evidence based on speeches

Bennani

Neuenkirch

2016

Applied Economics

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Speeches are an important vehicle for central bankers to convey individual views on the preferred policy stance. In this paper, we employ an automated text linguistic approach to create an indicator that measures the tone of the 1,618 speeches delivered by members of the Governing Council (GC) during the period 1999M1−2014M4. We then relate this variable to euro-area and national macroeconomic forecasts. Our key findings are as follows. First, inflation and growth expectations have a positive and significant impact on the hawkishness of a speech. Second, the voiced preferences of national central bankers largely coincide with the level of independence their banks had at the time of the Maastricht Treaty. Third, country-specific macroeconomic conditions matter for speeches delivered inside the central banker's home country but not for those made abroad. Fourth, differences in central banker preferences are the key source of variation in their speeches before the financial crisis, whereas divergent national economic conditions are the main factor in the second part of the sample.

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“…A severe misalignment of incentives at the euro area level has thus resulted, manifested in either domestic policies that had no consideration of broader, euro area effects, or from domestic policies that were predicated precisely on the ECB providing a bailout for profligate or inefficient policy; indeed, Cancelo et al (2011) show that members of the ECB Governing Council bring their own national baggage to monetary policies, and Hayo and Méon (2013) detail how this reality leads to ECB members setting monetary policy as a conglomeration of national needs rather than focusing on a euro area-only approach. And while the exact cause of the EMU crisis is in dispute, there is no doubt that the individual members of the ECB and their sovereign debt issues played a major role in starting the crisis.…”

Section: One Institution Amongst Manymentioning

confidence: 99%

Complexity, Uncertainty, and Monetary Policy: Can the ECB Avoid the Unconventional Becoming the ‘New Normal’?

Hartwell¹

2019

The Economists’ Voice

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Worries about Italy and the unresolved issue of euro governance – coupled with uncertainty surrounding Brexit – means that the European Central Bank (ECB) may already be facing its next crisis in the euro area. Unfortunately, the ECB is still fighting the last war, deploying the tools of unconventional monetary policy to address lingering problems while unable institutionally to address needed structural change. This paper looks at the ECB as an institution amongst institutions and shows how even more unconventional approaches will not help to bolster the economy of the euro area. Indeed, given the complexity of money, the effects of expectations, and continued uncertainty, expanding the ECB’s unconventional arsenal is likely to have deleterious consequences across Europe.

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Interest rate setting at the ECB: Individual preferences and collective decision making

Cited by 8 publications

References 19 publications

Behind closed doors: Revealing the ECB's decision rule

Behind closed doors: Revealing the ECB's decision rule

The (home) bias of European central bankers: new evidence based on speeches

Complexity, Uncertainty, and Monetary Policy: Can the ECB Avoid the Unconventional Becoming the ‘New Normal’?

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