Quantifying the European Central Bank's Interest Rate Smoothing Behavior*

Abstract

Against the background of the recent discussion whether the smoothing behavior of the Fed detected by empirical Taylor rules is indeed a fact or rather a statistically fiction, this paper re‐examines the empirical evidence for interest rate smoothing for the case of the European Central Bank (ECB). Based on data representing true ECB behavior, our findings reject the hypothesis of no smoothing but also find a role of serially correlated shocks. The degree of smoothing is estimated in the range of [0.38;0.82], reflecting model uncertainty with respect to the output gap and indicating a rather moderate extent of partial adjustment.

Conducting Monetary Policy in South Asian Economies: An Investigation

“…Equilibrium real interest rate is the average real interest rate over the observed period, excluding the financial crisis period. In the original version, the intercept of the Taylor rule represents the sum of the equilibrium real interest rate and the inflation target and takes the value of 4, the inflation gap has the value 1.5, while the reaction coefficient on the output gap has the value of 0.5 [Pinkwart (2013); Osterholm (2005)].…”

“…The other reasons could be avoiding reputation risks to the Central Banks from sudden reversals of interest rate directions [see Mohanty and Klau (2004); Goodhart (1999)]. Pinkwart (2013) noted that the inclusion of the lagged policy rate on the right hand side is often found to improve the fit to the data.…”

“…The partial adjustment parameter  lies in the interval [0;1] and v t is independently and identically distributed (iid) random shock to the policy rate [Pinkwart (2013)]. The magnitude of the parameter  measures the degree of interest rate smoothing behaviour by modern Central Banks [Wimanda, et al (2012); Pinkwart (2013)]. 8 Equation 2implies that the Central Bank adjusts its policy rate by a fraction (1-) of its current target level.…”

“…First, the standard regression analysis requires a continuous variable, but the policy rate (discount rate) changes in discretionary steps. Secondly, policy rate is not always the appropriate variable to correctly signal the stance of the monetary policy [Pinkwart (2013)].…”

A Quasi Real‐Time Leading Indicator for the EU Industrial Production

“…Even if the monetary policy is, in general, more complicated than what is suggested by the simple Taylor rule, over the last two decades this rule has captured the pattern of the interest policy rate in numerous countries rather well (Clarida et al, ). Some studies use as proxies of expectations of inflation and business cycle conditions the surveys of consumers or professional forecasters (Sauer and Sturm, ; Gorter et al, ; Pinkwart, ). In our empirical exercise, the expectations on inflation derived from the EU Commission consumer surveys and the LIs (i.e.…”