Seminar: ECB policy consistency at the ZLB

Time: 13.00-14.00 hours
Location: CPB-office, Van Stolkweg 14, The Hague

Presentation: Giulia Piccillo (Utrecht University)

Discussant: Jan Willem van den End (DNB)

Language: English

Registration:  Please register here

Abstract subject:
Prior to the crisis, the overnight lending rate of major central banks (ECB, FED, BoE) closely followed a Taylor rule and the central banks did not engage in extraordinary monetary policy in a substantial way. After 2008, the overnight lending rate has been fixed at a lower bound while the central banks engaged in extraordinary monetary policy measures. Since then central banks around the world have been studying new ways of remaining effective in the implementation of monetary policy. As a consequence, new and unconventional measures have been applied in unprecedented ways. However during this process the narrative around the real stance of monetary policy has become quite polarized, with some commenters arguing that the ECB has done too little too late. This paper proposes to address this debate by verifying the consistency of the ECB and comparing it to the consistency of the Fed and the Bank of England over the crisis period and its aftermath.  Specifically, we estimate the Taylor rule that best fits the ECB's interest rate policy before the crisis (2002-2008) and we show that this rule is consistent with the CB policy in recent years (2009-2015), i.e. it closely follows the shadow rate estimated by Wu and Xia (2014). The results are surprising given the harsh criticism that has been mounted against the ECB in recent years: According to our analysis when the past preferences of the Central Bank are taken into account, recent monetary policy is a very close match to the pre-crisis one. Moreover, the ECB displays much more consistency than the Federal Reserve and the BoE.  One of the key factors leading to this result seems to be the single mandate which the ECB has been following, which allowed it in the past to be strongly more reactive to changes in inflation than in output gap. On the other hand, the dual mandate of the Federal Reserve, reflected in its historical Taylor rule, has made it initially considerably harder to match its own rule without the possibility to adjust the policy rate (even more so considering the sudden large drop in output that characterized the US recession). However, even considering the differences in mandates, the ECB has done a more effective job of increasing its stance of monetary policy immediately following the beginning of the crisis, compared to its counterparts in UK and US. Since this is the first structured work to address this policy question in terms of Taylor rule consistency, these results are new to the field.

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