EUROPEAN CENTRAL BANK E C B E Z B E K T B C E E K P W O R K I N G PA P E R S E R I E S WORKING PAPER NO 192 IS THE EUROPEAN CENTRAL BANK (AND THE UNITED STATES FEDERAL RESERVE) PREDICTABLE? BY GABRIEL PEREZ-QUIROS AND JORGE SICILIA November 2002 EUROPEAN CENTRAL BANK W O R K I N G PA P E R S E R I E S WORKING PAPER NO 192 IS THE EUROPEAN CENTRAL BANK (AND THE UNITED STATES FEDERAL RESERVE) PREDICTABLE? BY GABRIEL PEREZ-QUIROS1 AND JORGE SICILIA2 November 2002 The authors would like to thank G de Bondt, G Camba-Méndez, F Drudi, J.L Escrivá, H.-J Klöckers, an anonymous referee and participants at an internal seminar for specific comments, to S Eusepi for assistance and useful discussions on an earlier version of the paper, and to R Pilegaard for assistance in the data collection Editorial suggestions from C Burns are gratefully acknowledged All remaining errors are our own responsibility.The views expressed herein are those of the authors and not necessarily represent those of the European Central Bank or of the Eurosystem Banco de España European Central Bank © European Central Bank, 2001 Address Kaiserstrasse 29 D-60311 Frankfurt am Main Germany Postal address Postfach 16 03 19 D-60066 Frankfurt am Main Germany Telephone +49 69 1344 Internet http://www.ecb.int Fax +49 69 1344 6000 Telex 411 144 ecb d All rights reserved The views expressed in this paper not necessarily reflect those of the European Central Bank Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged ISSN 1561-0810 Contents Abstract Executive Summary Introduction Heuristic approach to measure the predictability of the monetary policy decisions 10 Monetary policy shocks, surprises and monetary policy decisions of the ECB 3.1 What we mean by monetary policy shocks? 3.2 Monetary policy shocks in the euro area: which rates could we use? 3.3 Monetary policy shocks in the euro area: applying principal components (PC) 3.4 An analysis of the monetary policy shocks and the monetary policy decisions of the ECB (and the US Federal Reserve) 13 13 14 16 16 Has the daily pattern of the variance of these shocks changed with the announcements of monetary policy? 18 Impact of the shocks on the term structure of interest rates 5.1 Monetary policy shocks and the yield curve 5.2 Monetary policy shocks and the implicit interest rates at long horizons 21 22 25 Conclusions 28 Bibliography 29 Annex Description of the data Annex Principal components Annex 3: estimation of a Probit 33 35 37 Tables Figures 38 49 European Central Bank Working Paper Series 57 ECB • Working Paper No 192 • November 2002 Abstract The objective of this paper is to examine the predictability of the monetary policy decisions of the Governing Council of the ECB and the transmission of the unexpected component of the monetary policy decisions to the yield curve We find, using new methodologies, that markets not fully predict the ECB decisions but the lack of perfect predictability is comparable with the results found for the United States Federal Reserve We also find that the impact of monetary policy shocks on bond yields declines with the maturity of the bonds, and that this impact is significantly lower when the shock stems from a monetary policy meeting of the ECB Using implicit rates instead of bond yields, we find evidence that the market views the ECB as credible Keywords: Predictability, monetary policy shocks, principal components, transmission of monetary policy JEL classification: C22, E52 ECB • Working Paper No 192 • November 2002 Executive Summary The objective of this paper is to examine the predictability of the monetary policy decisions of the Governing Council of the ECB and the transmission of the unexpected component of its monetary policy decisions to the yield curve With respect to the first goal, the predictability analysis, we apply a battery of tests and we conclude that the markets have predicted the monetary policy decisions of the ECB rather well However, the results not accept the hypothesis of perfect predictability To evaluate the magnitude of the deviations from this hypothesis, applying the same battery of tests, we draw a comparison of these results and those obtained on the predictability of the monetary policy decisions of the United States Federal Reserve during the same period We provide evidence that the predictability of both central banks is broadly similar With respect to the second objective, we analyse the impact of the unexpected component of the monetary policy decisions on the term structure of interest rates in the euro area We use series of daily monetary policy shocks in the euro area in which the observations on the days of the monetary policy meetings of the ECB are the unexpected component of the monetary policy decisions This allows us to identify the impact of the surprise part of a monetary policy decision on the yield curve and compare it to the normal response of the yield curve to other daily shocks We show that the impact of the daily monetary policy shocks on bond yields declines with the maturity of the bonds, and that this impact is significantly lower when the shock stems from a monetary policy meeting of the ECB Using implicit rates instead of bond yields, we find evidence that the market views the ECB as credible In addition to the former contributions, the paper presents a new methodology to approach the problem of measuring monetary policy shocks and predictability of central bank decisions The contributions can be summarise as follows: First, as a difference to other standard papers in the literature, we use daily data and consider all days, not only meeting days or “T” days before the meetings Our purpose with this approach is twofold First, to have daily series of monetary policy shocks which can be interpreted as how market participants change the expected path of monetary policy interest rates on a daily basis (at different horizons) as new information becomes available Second and taking advantage of this series, to test for the significance of the shocks associated with the monetary policy meetings compared to the shocks produced on any other day Second, we gather information about the shocks from different money market interest rates, avoiding the liquidity (and potentially other) consideration(s) unrelated to monetary policy expectations that affect the individual series We comprise the information of the different ECB • Working Paper No 192 • November 2002 rates by using principal components This approach allows us to get a rich variety of conclusions on how the new daily information affects the expected path of monetary policy rates at different horizons For example, we show that the impact of monetary policy decisions (either to change the key ECB interest rates or to maintain them unchanged) can be considered surprises when we use very short-term rates but not so when using longer-term rates We see this as evidence showing that the surprises on monetary policy decisions might be more related to the timing of the decisions than to the decision itself Third, we measure the predictability of the monetary policy decisions of a central bank from different points of view by using different techniques in order to check the robustness of our findings These techniques go from a graphical intuition to an EGARCH specification for the principal components of the series, going through an heuristic approach based on a weighted average of the possible outcomes, an analysis of the probabilities of change based on a probit specification and linear regressions for the transmission mechanism Finally, to our knowledge the paper presents the most comprehensive approach to compare the euro area and the US in terms of the amount of information used, a preliminary analysis of the series in order to take into account the differences due to maturity, liquidity, etc., the variety of techniques used and the robustness of the results ECB • Working Paper No 192 • November 2002 Introduction Not so long ago central banks gave little weight to being transparent; providing timely, open and clear information on their mandate, strategy, assessment and decisions to the public This has changed significantly in the recent past for good reasons and today transparency is viewed as a very important component of the monetary policy framework of a central bank One of these reasons is related to the notion of credibility Credibility is ultimately driven by the ability and track record of the central bank in fulfilling its mandate, and can be defined as the belief on the side of the public that price stability will be maintained over the medium term Transparency facilitates the understanding of what the central bank does and by doing so, it helps central banks to foster their credibility Another important reason stems from the finding that that forward-looking economic agents have relevant methodological consequences for the monetary transmission mechanism (see McCallum, 1999, 2001) If the market2 fully understands the role of a central bank, the belief in the commitment to maintaining price stability over the medium term should anchor inflation expectations and induce a ‘rule like’ behaviour on the part of market participants This would lead the market to react to the new information changing their expected path of monetary policy rates in a way consistent with the monetary policy strategy of the central bank By being transparent, expectations on the path of future monetary policy decisions are formed more efficiently and accurately The policy makers understand this and have stressed their commitment to stand up to the challenge For example, in the words of a monetary policy maker in the euro area, “when the markets correctly anticipate that a new piece of information will lead to a change in official interest rates they will much of the work themselves through a change in the term structure”, Issing (1999) Has this been the case? Ideally, it could be considered that the relevant question to be answered is to what extent the market expectation on the future path of monetary policy rates is broadly in line with the view of the central bank at every point in time This is however hard to test What can be analysed instead is to what extent a central bank has been predictable; whether market participants have anticipated its monetary policy decisions By There are many definitions of transparency in the literature In King et al (1998) it is defined it as a “process by which information about existing conditions, decisions, and actions is made accessible, visible, and understandable” This definition is broadly in line with Winkler (2000), where transparency is (“broadly and loosely”) defined as the “degree of genuine understanding of the monetary policy process and policy decisions by the public” Several authors (Eijffinger and Geraats (2002), Gerbach and Hahn (2002)) have useful discussions about the different aspects of transparency While the distinction between market participants and the public at large is relevant for the communication of a central bank, given the empirical nature of the paper, we will concentrate on market participants ECB • Working Paper No 192 • November 2002 becoming more predictable, a central bank gains the ability to influence interest rates before the announcement of its monetary policy decisions Predictability is sometimes viewed as a necessary consequence of transparency In this vein, the degree of predictability of a central bank is thus sometimes seen as a way of measuring whether it is transparent For example, Poole and Rasche (2001) argue that with complete transparency, the monetary policy decisions of a central bank should be fully predictable In fact, they test the predictability of the United States Fed by checking to what extent monetary policy decisions affect market rates, as their view is that policy announcements should not provide information to market participants, and thereby should not trigger any reaction of asset prices It is clear that a higher degree of transparency should be connected to a higher degree of predictability However, it can also be argued that perfect predictability might not be fully attainable in a world of uncertainty The decision making process of monetary policy is a complex one in which all relevant pieces of information have to be assessed in the light of their implications for the monetary policy mandate Given that the outcome of the process of mapping all the information on the state and the functioning of the economy (which is inherently uncertain) to take monetary policy decisions is based on judgement and is not done mechanically, it could be argued that a certain lack of predictability might not necessarily be related to a lack of transparency Some authors also argue that when the decision is a collective one, as in the case of the European Central Bank (ECB), full transparency (in fact, operational transparency) may not be reached In this same vein, the precise timing of monetary policy decisions may be hard to anticipate perfectly, especially if monetary policy meetings are held very frequently, as was the case for the Governing Council of the ECB before November 2001 Whilst in a world of uncertainty policy actions will most likely never be fully predictable, from the point of view of central bank it is important to avoid being unpredictable (or perhaps more importantly, to avoid that market uncertainty increases because of an incorrect interpretation of its own behaviour) This calls for the need for a continuous effort to be transparent, communicate effectively and provide active guidance to the markets explaining Other considerations are important determinants of predictability, such as gradualism in interest rate decisions (Lange, Sack and Wicksell (2001)) See Cuikerman (2000) In addition, Winkler (2001) holds the view that as the monetary policy in the euro area is a relatively new event the level of common language and understanding between the central bank and market participants still needs to be fully tuned Until November 2001, the Governing Council of the ECB held monetary policy discussions at all of its meetings, generally every two weeks Since then, it has discussed monetary policy issues only once a month ECB • Working Paper No 192 • November 2002 its policy decisions.6 In fact, central banks care about predictability This paper analyses to what extent the markets have anticipated the monetary policy decisions of the ECB There is not one single approach to measure predictability in the empirical literature A great deal of work has been done to measure the predictability of monetary policy decisions in the United States and some European countries prior to the Monetary Union.7 However, the predictability of the monetary policy decisions of the ECB has not been tested extensively, partly due to the relatively short period of time in which the ECB has been conducting the single monetary policy in the euro area To our knowledge, two papers, Gaspar, Perez-Quiros and Sicilia (2001), Hartman, Manna and Manzanares (2001) have analysed it and found evidence indicating that financial markets have generally understood and predicted the monetary policy decisions of the ECB Interpreting the results is not easy While perfect predictability is the clearest benchmark that comes to our mind, given the above arguments it might not be too realistic For this reason, we also provide some evidence on the predictability of the United States Federal Reserve (Fed), which allows for a rouge comparison between the degree of predictability of the two central banks As the literature has typically found that predictability is an evolving process, and that the market has improved its ability to predict the monetary policy decisions over time,9 perhaps not enough time has passed yet for the ECB We also analyse the transmission of the unexpected component of the monetary decisions of the ECB to the term structure of interest rates The reaction of the yield curve to the unexpected component of the monetary policy decisions at the Federal Open Market Committee (FOMC) has been used in the literature (Roley and Sellon (1998), Poole and Rasche (2001), Kuttner (2001), Cochrane and Piazzesi (2002)) to analyse the predictability of the United States Fed Besides applying this analysis to the monetary policy decisions of the ECB, taking advantage of the series of daily monetary policy shocks estimated to assess Not surprising the markets cannot be an objective itself of monetary policy, following what market participants expect, regardless of the view the central bank holds on its assessment of the likelihood of reaching its objective As Blinder puts it: “markets tend to overreact, are susceptible to fads and speculative bubbles, and seem to be have more short-term horizons than central bankers.” While central banks should not have any interest in surprising the markets, it might be unavoidable on some occasions For example, for the Fed, among others, Roley and Sellon (1998), Poole and Rasche (2001), Kuttner (2001), Poole, Rasche and Thornton (2002), Cochrane and Piazzesi (2002); For the Bank of England, Haldane and Read (1999); for a series of European countries prior to the Monetary Union and the United States, see Favero et al (1998) and Buttiglione et al (1998) Ross (2002) extends the analysis of Gaspar, Perez Quiros and Sicilia (2001) for the ECB and compares the predictability of the ECB with the one of the Bank of England and the Federal Reserve Bernhardsen and Kloster (2002) also compare the predictability of several central banks using changes in the three-month interest rates For the United States (see references in footnote 9) a common finding is that the predictability of Fed’s actions increased after the decision to announce changes in Fed policy rates immediately after FOMC meetings In turn Haldane and Read (1999) show that the introduction of inflation targeting in the Bank of England improved the predictability of its monetary policy decisions ECB • Working Paper No 192 • November 2002 Table 9a Measuring the impact of monetary policy surprises on forward rates with Pcnoe ∆Rti = α i + β i PCjt + δ 1ia Dmeet + ε ti Implicits year year year year year year year year year 10 year beta (1) (b) 0.82 (12.70) 0.69 (8.47) 0.70 (7.24) 0.74 (6.67) 0.53 (6.11) 0.19 (1.28) 0.14 (1.03) 0.13 (1.03) 0.23 (2.11) 0.27 (2.60) betat-1 (1) (b1) 0.14 (2.54) 0.23 (2.60) -0.09 -(0.88) -0.06 -(0.54) -0.05 -(0.70) 0.05 (0.46) 0.05 (0.44) -0.28 -(1.90) -0.08 -(0.71) -0.05 -(0.36) delta1a (1) (c) -0.23 -(2.10) -0.50 -(3.26) -0.49 -(2.61) -0.79 -(2.98) -0.38 -(3.75) -0.11 -(0.55) -0.16 -(0.98) -0.11 -(0.61) -0.32 -(2.23) -0.16 -(1.04) delta1at-1 (1) (c1) 0.01 (0.07) -0.04 -(0.34) 0.01 (0.08) -0.05 -(0.26) -0.11 -(1.03) -0.01 -(0.09) -0.33 -(2.45) -0.09 -(0.55) 0.02 (0.13) -0.19 -(1.05) i ∆Rti = α i + β i PCj t + δ 1ib Dmeet + δ Dmove + ε ti delta1b(2) (d) -0.04 -(0.30) -0.37 -(1.91) -0.35 -(1.71) -0.38 -(1.38) -0.37 (0.00) 0.18 (0.00) 0.07 (0.34) 0.02 (0.06) -0.16 -(0.69) -0.13 -(0.40) delta1bt-1(2) (d1) 0.14 (0.92) 0.10 (0.63) 0.23 (1.60) -0.60 -(2.44) 0.00 (0.00) 0.00 (0.00) -0.53 -(1.79) -0.27 -(1.11) 0.20 (0.77) -0.29 -(1.12) delta2(2) (f) -0.24 -(1.31) -0.16 -(0.65) -0.17 -(0.72) -0.54 -(1.45) -0.16 -(0.99) -0.34 -(1.11) -0.30 -(1.56) -0.17 -(0.50) -0.21 -(0.97) -0.04 -(0.13) delta2t-1(2) (f1) -0.18 -(1.05) -0.17 -(1.13) -0.29 -(1.56) 0.71 (2.52) 0.00 (0.00) -0.06 -(0.26) 0.26 (0.88) 0.23 (0.86) -0.24 -(0.89) 0.13 (0.47) Impact on the respective forward rates from the following dummies ∆rti = α i + β i PCj t + δ 1ia Dmeet + ε ti i ∆rti = α i + β i PCj t + δ 1ib Dmeet + δ Dmove + ε ti With no lags With one lag No meet Meeting Move No move No meet Meeting Move (b) (b+c) (b+d+f) (b+d) (b) (b+c) (b+d+f) 0.82 0.59 0.54 0.78 0.96 0.74 0.64 year 0.69 0.19 0.16 0.32 0.92 0.38 0.31 year 0.70 0.21 0.17 0.35 0.61 0.13 0.03 year 0.74 -0.05 -0.18 0.36 0.68 -0.16 -0.12 year 0.53 0.15 0.01 0.17 0.48 -0.01 -0.05 year 0.19 0.08 0.03 0.37 0.24 0.12 0.03 year 0.14 -0.01 -0.09 0.22 0.20 -0.30 -0.31 year 0.13 0.02 -0.02 0.15 -0.15 -0.35 -0.34 year 0.23 -0.09 -0.14 0.07 0.15 -0.15 -0.25 year 0.27 0.11 0.10 0.14 0.22 -0.13 -0.11 10 year t statistics in parenthesis The constant is not significant (1) Equation 5a, (2) Equation 5b (s) stands for significant (in bold) and nos for not-significant at 95% Estimates incorporates one lag of the dependent varialble Estimation with LS and Newley West (NW) adjusted errors No move (b+d) 1.06 0.64 0.49 -0.29 0.11 0.42 -0.26 -0.40 0.20 -0.20 Table 9b Measuring the impact of monetary policy surprises on forward rates with Pcnoe ∆rt i = α i + β i PCj t + δ 1ia Dmeet + ε ti Averages medium(3) long (4) beta (1) (b) 0.29 (4.67) 0.23 (3.24) No meet (b) betat-1 (1) (b1) -0.02 -(0.38) -0.19 -(2.64) delta1a (1) (c) -0.21 -(2.31) -0.22 -(2.27) delta1at-1 (1) (c1) -0.12 -(1.42) -0.02 -(0.22) ∆rti = α i + β i PCjt + δ 1ib Dmeet + δ 2i Dmove + ε ti delta1b(2) (d) -0.04 -(0.24) -0.12 -(0.60) delta1bt-1(2) (d1) -0.19 -(1.53) -0.08 -(0.52) delta2(2) (f) -0.23 -(1.36) -0.13 -(0.72) Impact on the respective yield from the following dummies With no lags With one lag Meeting Move No move No meet Meeting Move (b+c) (b+d+f) (b+d) (b) (b+c) (b+d+f) medium(3) 0.29 0.08 0.03 0.25 0.27 -0.06 long (4) 0.23 0.01 -0.03 0.11 0.04 -0.21 t statistics in parenthesis The constant is not significant (1) Equation 5a, (2) Equation 5b (3) Average of implicit rates from the fourth to the sixth year (both included) (4) Average of implicit rates from the seventh to the ninth year (both included) (s) stands for significant (in bold) and nos for not-significant at 95% Estimates incorporates one lag of the dependent varialble Estimation with LS and Newley West (NW) adjusted errors ECB • Working Paper No 192 • November 2002 delta2t-1(2) (f1) 0.09 (0.64) 0.07 (0.39) No move (b+d) -0.10 0.04 -0.23 -0.16 47 Table A Ordered probit estimates Coefficient Et(Akt+1) At meeting End maintenance period Beginning maintenance period Avg Log likelihood Pseudo R2 Note: z-statistics in parentheses 48 EONIA PCshort PCnoe PCall PClong 4.11 (4.28) 7.88 (5.93) -6.54 -(3.87) -6.24 -(4.74) 12.19 (0.51) 34.96 (1.10) -24.93 -(0.27) -28.04 -(0.87) 0.54 (0.04) 24.35 (1.73) -3.55 -(0.13) -0.55 -(0.01) 1.61 (0.12) 23.48 (1.72) -5.10 -(0.22) -8.19 -(0.25) 0.12 (0.01) 23.89 (1.61) -1.25 -(0.04) 0.34 (0.01) -0.03 0.59 0.00 0.97 -0.01 0.85 -0.01 0.86 -0.01 0.87 ECB • Working Paper No 192 • November 2002 ECB • Working Paper No 192 • November 2002 49 0.00 0.25 0.50 0.75 mar99 may99 jul99 sep99 7-oct-99 nov99 ene00 mar00 13-abr-00 may00 jul00 sep00 11-may-00 25-may-00 nov00 ene01 mar01 may01 jul01 10-may-01 sep01 nov01 probability bounds change/no change ene02 mar02 Market failure to anticipate the monetary policy decision Market correct anticipation of the monetary policy decision Changes in the key ECB interest rates Figure 1: Prediction of the changes in the key ECB interest rates using the 2-week EONIA swap rate Bars represent changes in the key ECB interest rates Circles represent the probability calculated with the two-week EONIA swap rate market of a change in the MRO rate (fixed rate since June 2000 and the minimum bid rate thereafter) one day before the Governing Council meeting Since November 2001, the Governing Council discuss monetary policy once a month, instead of bimonthly (see text) The two-week EONIA swap is lowered by basis points to reflect the natural spread between the market rate and the MRO rate Clear (dark) circles represent cases in which the prediction of the market was correct (incorrect) Dotted lines are drawn at +/-12.5 basis points and represent the boundary of the 50% probability assigned to a change in the MRO rate (see text) Only the dates in which the monetary policy decisions were not predicted (dark circles) are labelled in the Figure -0.75 ene99 -0.50 -0.25 percentage points may02 50 ECB • Working Paper No 192 • November 2002 0.00 0.25 0.50 0.75 mar99 may99 jul99 sep99 15-jul-99 7-oct-99 nov99 ene00 21-oct-99 mar00 may00 jul00 sep00 11-may-00 13-abr-00 25-may-00 nov00 ene01 mar01 29-mar-01 may01 jul01 10-may-01 sep01 probability bounds no change nov01 ene02 25-oct-01 mar02 Market failure to anticipate the monetary policy decision Market correct anticipation of the monetary policy decision Changes in the key ECB interest rates (secondary axis) Figure 2: Prediction of the key ECB interest rates using the one-month EONIA-swap rate Bars represent changes in the key ECB interest rates Circles represent the probability calculated with the one-month EONIA swap rate market of a change in the MRO rate (fixed rate since June 2000 and the minimum bid rate thereafter) one day before the Governing Council meeting Since November 2001, the Governing Council discuss monetary policy once a month, instead of bimonthly (see text) The two-week EONIA swap is lowered by basis points to reflect the natural spread between the market rate and the MRO rate Clear (dark) circles represent cases in which the prediction of the market was correct (incorrect) Dotted lines are drawn at +/-12.5 basis points and represent the boundary of the 50% probability assigned to a change in the MRO rate (see text) Only the dates in which the monetary policy decisions were not predicted (dark circles) are labelled in the Figure Source: Reuters and own calculations -0.75 ene99 -0.50 -0.25 percentage points may02 ECB • Working Paper No 192 • November 2002 51 0.00 0.25 0.50 0.75 -0.75 -0.50 -0.25 percentage points jun-99 ago-99 oct-99 dic-99 feb-00 abr-00 jun-00 ago-00 oct-00 dic-00 3-ene-01 feb-01 abr-01 jun-01 ago-01 oct-01 18-abr-01 dic-01 Probability bounds no change/change feb-02 abr-02 Bars represent changes in the Fed Fund rates Circles represent the probability calculated with the one-month dollar Libor of a change in the Fed Fund rate one day before the FOMC meeting The one-month market rate is lowered by 13 basis points to reflect the risk premia embedded in this one-month rate Clear (dark) circles represent cases in which the prediction of the market was correct (incorrect) Dotted lines are drawn at +/-12.5 basis points represent the boundary of the 50% probability assigned to a change in the Fed FUnd rate Only the dates in which the monetary policy decisions were not predicted are labelled in the Figure Source: Reuters and own calculations feb-99 abr-99 16-nov-99 Market failure to anticipate the monetary policy decisions Market correct anticipation of the monetary policy decision Changes in the Fed Fund Rates Figure 3: Prediction of the changes in the Fed Fund rates using the one month dollar Libor 52 ECB • Working Paper No 192 • November 2002 0.00 0.25 0.50 0.75 mar99 may99 8-abr-99 jul99 sep99 20-may-99 22-abr-99 nov99 ene00 7-oct-99 23-sep-99 mar00 may00 jul00 8-jun-00 sep00 nov00 ene01 mar01 may01 jul01 sep01 17-sep-01 21-jun-01 10-may-01 11-abr-01 nov01 ene02 Bounds of +/- standard deviation mar02 Monetary policy shock higher than sdv Monetary policy shock lower than sdv Changes in the key ECB interest rates Fig 4a Change in the key rates and monetary policy shocks (PCshort) Note: Bars represent the change in the key ECB interest rates Circles represent the monetary policy shocks on the days of the meeting of the Governing Council in which monetary policy is discussed (bimonthly meetings until November 2001, monthly meetings thereafter Dotted lines are drawn at the +/- standard deviations (normalised at 038) Source: Reuters and own calculations (see text) -0.75 ene99 -0.50 -0.25 percentage points may02 ECB • Working Paper No 192 • November 2002 53 percentage points mar99 may99 jul99 8-abr-99 sep99 nov99 7-oct-99 ene00 mar00 may00 jul00 8-jun-00 sep00 nov00 ene01 mar01 4-ene-01 5-oct-00 may01 10-may-01 jul01 sep01 17-sep-01 11-abr-01 nov01 ene02 mar02 Bounds of +/- standard deviation Monetary policy shock higher than sdv Monetary policy shock lower than sdv Changes in the key ECB interest rates Fig 4b Change in the key rates and monetary policy shocks (PCall) Note: Bars represent the change in the key ECB interest rates Circles represent the monetary policy shocks on the days of the meeting of the Governing Council in which monetary policy is discussed (bimonthly meetings until November 2001, monthly meetings thereafter Dotted lines are drawn at the +/- standard deviations (normalised at 038) Source: Reuters and own calculations (see text) -0.75 ene99 -0.50 -0.25 0.00 0.25 0.50 0.75 may02 54 ECB • Working Paper No 192 • November 2002 percentage points mar99 may99 8-abr-99 jul99 sep99 nov99 7-oct-99 ene00 mar00 may00 jul00 8-jun-00 sep00 nov00 mar01 4-ene-01 ene01 5-oct-00 may01 10-may-01 jul01 11-abr-01 sep01 nov01 17-sep-01 ene02 mar02 Bounds of +/- standard deviation may02 Monetary policy shock higher than sdv Monetary policy shock lower than sdv Changes in the key ECB interest rates Note: Bars represent the change in the key ECB interest rates Circles represent the monetary policy shocks on the days of the meeting of the Governing Council in which monetary policy is discussed (bimonthly meetings until November 2001, monthly meetings thereafter Dotted lines are drawn at the +/- standard deviations (normalised at 038) Source: Reuters and own calculations (see text) -0.75 ene99 -0.50 -0.25 0.00 0.25 0.50 0.75 Fig 4c Change in the key rates and monetary policy shocks (PCnoe) ECB • Working Paper No 192 • November 2002 55 Percentage points 8-abr-99 7-oct-99 3-feb-00 27-abr-00 8-jun-00 4-ene-01 10-may-01 11-abr-01 17-sep-01 Bounds of +/- standard deviation Monetary policy shock higher than sdv Monetary policy shock lower than sdv Changes in the key ECB interest rates -0.75 ene-99 mar-99 may-99 jul-99 sep-99 nov-99 ene-00 mar-00 may-00 jul-00 sep-00 nov-00 ene-01 mar-01 may-01 jul-01 sep-01 nov-01 ene-02 mar-02 may-02 Note: Bars represent the change in the key ECB interest rates Circles represent the monetary policy shocks on the days of the meeting of the Governing Council in which monetary policy is discussed (bimonthly meetings until November 2001, monthly meetings thereafter Dotted lines are drawn at the +/- standard deviations (normalised at 038) Source: Reuters and own calculations (see text) -0.50 -0.25 0.00 0.25 0.50 0.75 Fig 4d: Change in the key rates and monetary policy shocks (PClong) 56 ECB • Working Paper No 192 • November 2002 basis points feb99 abr99 jun99 ago99 oct99 dic99 16-nov-99 feb00 abr00 jun00 ago00 oct00 dic00 3-ene-01 feb01 abr01 18-abr-01 jun01 ago01 17-sep-01 15-may-01 27-jun-01 oct01 dic01 2-oct-01 feb02 6-nov-01 Bounds of +/- standard deviation Monetary policy shock lower than sdv Monetary policy shock higher than sdv Changes in the Fed Fund rate Note: Bars represent the change in the Fed Fund rates Circles represent the monetary policy shocks on the days of the meetings of the FOMC (scheduled and unscheduled) Dotted lines are drawn at the +/- standard deviations Source: Reuters and own calculations (see text) -0.75 -0.50 -0.25 0.00 0.25 0.50 0.75 Fig 5: Change in the Fed Fund rates and monetary policy shocks (PR) abr02 European Central Bank working paper series For a complete list of Working Papers published by the ECB, please visit the ECB’s website (http://www.ecb.int) 113 “Financial frictions and the monetary transmission mechanism: theory, evidence and policy implications” by C Bean, J Larsen and K Nikolov, January 2002 114 “Monetary transmission in the euro area: where we stand?” by I Angeloni, A Kashyap, B Mojon, D Terlizzese, January 2002 115 “Monetary policy rules, macroeconomic stability and inflation: a view from the trenches” by A Orphanides, December 2001 116 “Rent indices for housing in West Germany 1985 to 1998” by J Hoffmann and C Kurz., January 2002 117 “Hedonic house prices without characteristics: the case of new multiunit housing” by O Bover and P Velilla, January 2002 118 “Durable goods, price indexes and quality change: an application to automobile prices in Italy, 1988-1998” by G M Tomat, January 2002 119 “Monetary policy and the stock market in the euro area” by N Cassola and C Morana, January 2002 120 “Learning stability in economics with heterogenous agents” by S Honkapohja and K Mitra, January 2002 121 “Natural rate doubts” by A Beyer and R E A Farmer, February 2002 122 “New technologies and productivity growth in the euro area” by F Vijselaar and R Albers, February 2002 123 “Analysing and combining multiple credit assessments of financial institutions” by E Tabakis and A Vinci, February 2002 124 “Monetary policy, expectations and commitment” by G W Evans and S Honkapohja, February 2002 125 “Duration, volume and volatility impact of trades” by S Manganelli, February 2002 126 “Optimal contracts in a dynamic costly state verification model” by C Monnet and E Quintin, February 2002 127 “Performance of monetary policy with internal central bank forecasting” by S Honkapohja and K Mitra, February 2002 128 “Openness, imperfect exchange rate pass-through and monetary policy” by F Smets and R Wouters, February 2002 ECB • Working Paper No 192 • November 2002 57 129 “Non-standard central bank loss functions, skewed risks, and certainty equivalence” by A al-Nowaihi and L Stracca, March 2002 130 “Harmonized indexes of consumer prices: their conceptual foundations” by E Diewert, March 2002 131 “Measurement bias in the HICP: what we know, and what we need to know?” by M A Wynne and D Rodríguez-Palenzuela, March 2002 132 “Inflation dynamics and dual inflation in accession countries: a “new Keynesian” perspective” by O Arratibel, D Rodríguez-Palenzuela and C Thimann, March 2002 133 “Can confidence indicators be useful to predict short term real GDP growth?” by A Mourougane and M Roma, March 2002 134 “The cost of private transportation in the Netherlands, 1992-1999” by B Bode and J Van Dalen, March 2002 135 “The optimal mix of taxes on money, consumption and income” by F De Fiore and P Teles, April 2002 136 “Retail bank interest rate pass-through: the new evidence at the euro area level” by G de Bondt, April 2002 137 “Equilibrium bidding in the eurosystem’s open market operations” by U Bindseil, April 2002 138 “New” views on the optimum currency area theory: what is EMU telling us?” by F P Mongelli, April 2002 139 “On currency crises and contagion” by M Fratzscher, April 2002 140 “Price setting and the steady-state effects of inflation” by M Casares, May 2002 141 “Asset prices and fiscal balances” by F Eschenbach and L Schuknecht, May 2002 142 “Modelling the daily banknotes in circulation in the context of the liquidity management of the European Central Bank”, by A Cabrero, G Camba-Mendez, A Hirsch and F Nieto, May 2002 143 “A non-parametric method for valuing new goods”, by I Crawford, May 2002 144 “A failure in the measurement of inflation: results from a hedonic and matched experiment using scanner data”, by M Silver and S Heravi, May 2002 145 “Towards a new early warning system of financial crises”, by M Fratzscher and M Bussiere, May 2002 146 “Competition and stability – what’s special about banking?”, by E Carletti and P Hartmann, May 2002 58 ECB • Working Paper No 192 • November 2002 147 “Time-to-build approach in a sticky price, stricky wage optimizing monetary model, by M Casares, May 2002 148 “The functional form of yield curves” by V Brousseau, May 2002 149 “The Spanish block of the ESCB-multi-country model” by A Estrada and A Willman, May 2002 150 “Equity and bond market signals as leading indicators of bank fragility” by R Gropp, J Vesala and G Vulpes, June 2002 151 “G-7 inflation forecasts” by F Canova, June 2002 152 “Short-term monitoring of fiscal policy discipline” by G Camba-Mendez and A Lamo, June 2002 153 “Euro area production function and potential output: a supply side system approach” by A Willman, June 2002 154 “The euro bloc, the dollar bloc and the yen bloc: how much monetary policy independence can exchange rate flexibility buy in an interdependent world?” by M Fratzscher, June 2002 155 “Youth unemployment in the OECD: demographic shifts, labour market institutions, and macroeconomic shocks” by J F Jimeno and D Rodriguez-Palenzuela, June 2002 156 “Identifying endogenous fiscal policy rules for macroeconomic models” by J J Perez, and P Hiebert, July 2002 157 “Bidding and performance in repo auctions: evidence from ECB open market operations” by K G Nyborg, U Bindseil and I A Strebulaev, July 2002 158 “Quantifying Embodied Technological Change” by P Sakellaris and D J Wilson, July 2002 159 “Optimal public money” by C Monnet, July 2002 160 “Model uncertainty and the equilibrium value of the real effective euro exchange rate” by C Detken, A Dieppe, J Henry, C Marin and F Smets, July 2002 161 “The optimal allocation of risks under prospect theory” by L Stracca, July 2002 162 “Public debt asymmetries: the effect on taxes and spending in the European Union” by S Krogstrup, August 2002 163 “The rationality of consumers’ inflation expectations: survey-based evidence for the euro area” by M Forsells and G Kenny, August 2002 164 “Euro area corporate debt securities market: first empirical evidence” by G de Bondt, August 2002 ECB • Working Paper No 192 • November 2002 59 165 “The industry effects of monetary policy in the euro area” by G Peersman and F Smets, August 2002 166 “Monetary and fiscal policy interactions in a micro-founded model of a monetary union” by R M.W.J Beetsma and H Jensen, August 2002 167 “Identifying the effects of monetary policy shocks on exchange rates using high frequency data" by J Faust, J.H Rogers, E Swanson and J.H Wright, August 2002 168 “Estimating the effects of fiscal policy in OECD countries” by R Perotti, August 2002 169 “Modeling model uncertainty” by A Onatski and N Williams, August 2002 170 “What measure of inflation should a central bank target?” by G Mankiw and R Reis, August 2002 171 “An estimated stochastic dynamic general equilibrium model of the euro area” by F Smets and R Wouters, August 2002 172 “Constructing quality-adjusted price indices: a comparison of hedonic and discrete choice models” by N Jonker, September 2002 173 “Openness and equilibrium determinacy under interest rate rules” by F de Fiore and Z Liu, September 2002 174 “International monetary policy coordination and financial market integration” by A Sutherland, September 2002 175 “Monetary policy and the financial accelerator in a monetary union” by S Gilchrist, J.O Hairault and H Kempf, September 2002 176 “Macroeconomics of international price discrimination” by G Corsetti and L Dedola, September 2002 177 “A theory of the currency denomination of international trade” by P Bacchetta and E van Wincoop, September 2002 178 “Inflation persistence and optimal monetary policy in the euro area” by P Benigno and J.D López-Salido, September 2002 179 “Optimal monetary policy with durable and non-durable goods” by C.J Erceg and A.T Levin, September 2002 180 “Regional inflation in a currency union: fiscal policy vs fundamentals” by M Duarte and A.L Wolman, September 2002 181 “Inflation dynamics and international linkages: a model of the United States, the euro area and Japan” by G Coenen and V Wieland, September 2002 182 “The information content of real-time output gap estimates, an application to the euro area” by G Rünstler, September 2002 60 ECB • Working Paper No 192 • November 2002 183 “Monetary policy in a world with different financial systems” by E Faia, October 2002 184 “Efficient pricing of large value interbank payment systems” by C Holthausen and J.-C Rochet, October 2002 185 “European integration: what lessons for other regions? The case of Latin America” by E Dorrucci, S Firpo, M Fratzscher and F P Mongelli, October 2002 186 “Using money market rates to assess the alternatives of fixed vs variable rate tenders: the lesson from 1989-1998 data for Germany” by M Manna, October 2002 187 “A fiscal theory of sovereign risk” by M Uribe, October 2002 188 “Should central banks really be flexible?” by H P Grüner, October 2002 189 “Debt reduction and automatic stabilisation” by P Hiebert, J J Pérez and M Rostagno, October 2002 190 “Monetary policy and the zero bound to interest rates: a review” by T Yates, October 2002 191 “The fiscal costs of financial instability revisited” by F Eschenbach and L Schuhknecht, November 2002 192 “Is the European Central Bank (and the United States Federal Reserve) predictable” by G Perez-Quiros and J Sicilia, November 2002 ECB • Working Paper No 192 • November 2002 61 .. .EUROPEAN CENTRAL BANK W O R K I N G PA P E R S E R I E S WORKING PAPER NO 192 IS THE EUROPEAN CENTRAL BANK (AND THE UNITED STATES FEDERAL RESERVE) PREDICTABLE? BY GABRIEL... the series This increase is similar to the one observed to the one associated in the United States to the meetings of the FOMC At the same time, the results seem to indicate that the market is. .. Abstract The objective of this paper is to examine the predictability of the monetary policy decisions of the Governing Council of the ECB and the transmission of the unexpected component of the monetary