What drives the ECB? An Augmented Taylor Rule for the Eurozone 

The rise of implicit targets. To test the importance of other motives, we ran selected augmented Taylor Rules, adding explanatory variables and looking at their contributions over time to explain the ECB’s policy stance. Sovereign risk premia, financial stress and volatility indicators, measures of economic policy uncertainty and banks’ stock market performance all appeared relevant to the ECB’s decision-making over the past ten years. Their significance, especially in the case of peripheral spreads and financial stress indicators, peaked at the time of the Euro sovereign debt crisis.

Inflation matters (again): From 2018 onwards, inflation has made a comeback in explaining most of the accommodative monetary policy stance. However, our results suggest that banks’ stock prices continue to feature high on the ECB dashboard in recent years, especially when compared to other stress indicators.

Contact

Ludovic Subran
Allianz SE