Download This PaperThe Zero Lower Bound, ECB Interest Rate Policy and the Financial Crisis
44 Pages Posted: 24 Oct 2011
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The Zero Lower Bound, ECB Interest Rate Policy and the Financial Crisis
The Zero Lower Bound, ECB Interest Rate Policy and the Financial Crisis
Date Written: July 1, 2010
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 functions, zero lower bound, smooth transition
JEL Classification: C2, E52
Suggested Citation: Suggested Citation
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