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Unveiling the ECB's Monetary Policy Behaviour Under Different Inflation Regimes
Author(s) -
Kazanas Thanassis,
Tzavalis Elias
Publication year - 2015
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/ecca.12132
Subject(s) - economics , inflation (cosmology) , monetary policy , monetary economics , keynesian economics , interest rate , new keynesian economics , inflation targeting , macroeconomics , physics , theoretical physics
This paper provides clear‐cut evidence that the ECB follows an asymmetric monetary policy rule concerned more with inflation rather than sustaining economic growth. The driving force of interest rate cuts is the fall of the inflation rate below its target level. The paper evaluates the implications of the above policy on real activity by simulating a small New Keynesian model. This clearly indicates that the reaction of the ECB to negative output deviations and/or to financial stress conditions in the low inflation regime fails to reduce the adverse effects of negative demand and financial sector shocks on economic activity.