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

Claudia Curi, Lucia Milena Murgia

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Abstract

This paper investigates whether financial markets stability matters in setting monetary policy in the case of the European Central Bank and Bank of England. We show that our Tri-mandate Taylor rule better explains the deviations of the observed policy rate from the implied interest rates for both central banks. The forward-looking version 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 BOE. Lastly, we show that the preferences of monetary policy makers have shifted in the aftermath of the 2008 financial crisis.
Original languageEnglish
Article number103486
JournalFinance Research Letters
Volume51
Early online date12 Nov 2022
DOIs
Publication statusE-pub ahead of print - 12 Nov 2022

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