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Article
Interest Rate Setting at the ECB Following the Financial and Sovereign Debt Crises, in Real Time
Modern Economy
  • Sharmila K. King, University of the Pacific
  • Florence Bouvet, Sonoma State University
Document Type
Article
Department
Economics
DOI
10.4236/me.2011.25083
Publication Date
11-1-2011
Disciplines
Abstract
We analyse European Central Bank (ECB) policy by estimating a forward-looking, augmented Taylor rule using expectations data. Specifically, we investigate the impact of the financial and sovereign debt crises on ECB policy. We find the European Overnight Index Average (EONIA) rises when expected economic activity is strong. Regardless of the inflation measure, inflation is not associated with the EONIA. Using a recursive estimation and a Chow test, we identify a policy shift in December 2008. The more generally accepted starting date of the crisis, August 2007, does not correspond to a statistically significant shift in the ECB policy. Using December 2008 for a policy shift, general financial market sentiment, as measured by VSTOXX, is not significant in explaining EONIA movements. The ECB’s response to a shock to economic activity has been more moderate since the crises. However, the EONIA increases as Greek sovereign risk rises, possibly from increasing demand for liquidity by banks.
Citation Information
F. Bouvet and S. King, "Interest-Rate Setting at the ECB Following the Financial and Sovereign Debt Crises, in Real-Time," Modern Economy, Vol. 2 No. 5, 2011, pp. 743-756. doi: 10.4236/me.2011.25083.