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This paper investigates why flnancial 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, in∞ation, and output to discover the sources of in- dividual interest rate forecast errors. Based on a panel random coe-cient model, we show that flnancial experts have systematically misperceived the ECB's in- terest rate rule. However, although experts tend to overestimate the impact of in∞ation on future interest rates, perceptions of monetary policy have become more accurate since clariflcation of the ECB's monetary policy strategy in May 2003. We flnd that this improved communication has reduced disagreement over the ECB's response to expected in∞ation during the flnancial crisis.

Why Do Financial Market Experts Misperceive Future Monetary Policy Decisions?