Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/216648 
Year of Publication: 
2020
Series/Report no.: 
MAGKS Joint Discussion Paper Series in Economics No. 08-2020
Publisher: 
Philipps-University Marburg, School of Business and Economics, Marburg
Abstract: 
This paper analyzes the interest rate setting of the European Central Bank (ECB) both before and after the outbreak of the global financial crisis. In the current monetary policy literature, researchers typically select one Taylor rule-based model in order to analyze the interest rate setting of central banks, but neglect uncertainty about the choice of this respective model. We apply a Bayesian model averaging (BMA) approach to extend the standard Taylor rule to account for model uncertainty driven by heterogeneity in the ECB decision-making body, the governing council. Our results suggest the following: First, the ECB acts according to its official mandate to maintain price stability and therefore to focus its decisions on the inflation rate. Second, economic activity measures have been in the focus of the ECB before the financial crisis broke out. Third, over the last decade, the role of economic activity for ECB monetary policy has decreased so that inflation seems to be the main driver of monetary policy decisions. Fourth, central bankers appear to consider more than one model when they decide about monetary policy measures.
Subjects: 
European Central Bank
Taylor Rule
Bayesian Model Averaging
Model Uncertainty
JEL: 
C11
E43
D81
E52
E58
Document Type: 
Working Paper

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