Discussion paper / School of Business & Economics ; 2010/29 : Economics
Central bank communication; Interest rate forecasts; Survey expectations; Panel random coefficient model
337 Internationale Volkswirtschaft 339 Makroökonomie und verwandte Themen
This paper investigates why financial market experts misperceive the interest
rate policy of the European Central Bank (ECB). Assuming a Taylor-rule-type
reaction function of the ECB, we use qualitative survey data on expectations
about the future interest rate, inflation, and output to discover the sources of in-
dividual interest rate forecast errors. Based on a panel random coefficient model,
we show that financial experts have systematically misperceived the ECB's in-
terest rate rule. However, although experts tend to overestimate the impact of
inflation on future interest rates, perceptions of monetary policy have become
more accurate since clarification of the ECB's monetary policy strategy in May
2003. We find that this improved communication has reduced disagreement over
the ECB's response to expected inflation during the financial crisis.
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