Does ECB Communication Help in Predicting its Interest Rate Decisions?
30 Pages Posted: 6 Oct 2006
Date Written: September 2006
Abstract
We examine the usefulness of communication by the European Central Bank for predicting its interest rate decisions. We use ordered probit models based on the Taylor rule which we estimate using statements by ECB officials as well as macroeconomic variables. Statements by ECB officials on the main refinancing rate and future inflation are significantly related to ECB decisions. However, an out-of-sample evaluation shows that communication-based models do not outperform models based on macroeconomic data in predicting decisions. Both sets of models only accurately predict decisions to leave interest rates unchanged.
Keywords: ECB communication, interest rate decision, Taylor rule, ordered probit models
JEL Classification: E43, E52, E58
Suggested Citation: Suggested Citation
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