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Forecast Targeting and Financial Stability: Evidence from the European Central Bank and Bank of England

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Author
Claudia Curi Lucia Milena Murgia
Category
Financial
Date Posted
2022/08/02
Date Retrieved
2022/09/22
Date Revised
Date Written
Description
This paper investigates whether financial markets stability matters in setting monetary policy in the case of the European Central Bank and Bank of England over the period 2003-2018. We show that compared to the traditional Taylor Rule our Tri-mandate Taylor rule better explains the deviations of the observed policy rate from the implied interest rates for both central banks. Moreover the forward-looking version of the Tri-mandate Taylor rule shows that the monetary policy conducted by the ECB is largely affected by the US financial market stability while only the domestic financial market stability affects the monetary policy of BOE. Lastly we show that the preferences of monetary policy makers have shifted over time particularly in the aftermath of the 2008 financial crisis.
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JEL Classifications
D78 E44 E52 E58 E63 G14
Keywords
Central bank Financial Stability Forecast Targeting Monetary Policy Taylor Rule Tri-mandate.
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12
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URL
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4227029
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