Have money and credit data releases helped markets to predict the interest rate decisions of the European Central Bank?

AuthorAlexander Jung
Publication Date01 February 2018
Date01 February 2018
Alexander Jung*
This paper examines whether money and credit data releases by the European
Central Bank (ECB) have provided markets with additional clues about the
future course of its monetary policy. It conducts a novel econometric approach,
as suggested by El-Shagi and Jung (Eur J Polit Econ 39:222234, 2015), based
on a combination of an Ordered Probit model explaining future policy rate
changes (sample 20002014) and the Vuong test for model selection. Overall,
our empirical results support the view that information contained in money and
credit aggregates is used by markets when assessing forthcoming interest
changes of the ECB.
Today communication plays an important role in central banking (Blinder
et al., 2008; Ehrmann and Fratzscher, 2009). While there is ample evidence
suggesting that the communications of the European Central Bank (ECB)
have improved the predictability of its interest rate decisions (Janssen and de
Haan, 2009; Sturm and de Haan, 2011), it is not clear to what extent the
ECB’s monetary analysis has contributed to it. The ECB is one of the few
central banks in the world emphasising the importance of a separate monetary
analysis for assessing the risks to price stability. In the ECB’s two-pillar mon-
etary policy strategy, its monetary analysis serves as a cross-check of the eco-
nomic analysis and provides an additional communication device emphasising
its commitment to price stability (e.g. Masuch et al., 2003; Papademos and
Stark, 2010).
In the first years of the existence of the ECB, it was widely perceived that
the ECB marches in lockstep with the Bundesbank implying similarities in the
reaction function (Hayo and Hofmann, 2006). Markets reacted to releases of
the broad monetary aggregate M3 in a significant way (Ehrmann and
*European Central Bank
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12143, Vol. 65, No. 1, February 2018
©2017 Scottish Economic Society.
Fratzscher, 2002) and the release of M3 data had a significant influence on
financial market prices in the euro area (Coffinet and Gouteron, 2009). It is,
however, not clear whether markets took these data into account as leading
indicators of inflation and growth or whether they learned something from
the data releases when predicting forthcoming interest rate changes of the
ECB. Some researchers have argued that, in real time, monetary data in com-
bination with economic forecasts are useful for predicting the ECB’s monetary
policy decisions at forthcoming meetings and should therefore be taken seri-
ously by market observers (Gerlach, 2007; Fischer et al., 2009). Other
researchers have found that the ECB’s statements on money were not an
important determinant of its actions (Berger et al., 2011). The ECB’s state-
ments on price developments would represent more important news to finan-
cial markets (Lamla and Lein, 2011).
To this end, a knowledge gap exists whether markets have used the indica-
tions from the ECB’s monetary analysis in their assessments of forthcoming
interest rate changes. The aim of this paper was to address this gap by empiri-
cally examining the extent to which the release of money and credit data in
the euro area has helped markets in forming their expectations on future pol-
icy decisions of the ECB. This question is different from previous research,
which estimated reaction functions of the ECB (Gerlach and Lewis, 2014) or
aimed at measuring the impact of communications or data releases on market
interest rates (Coffinet and Gouteron, 2009; Brand et al., 2010). Our empirical
analysis pursues a novel approach, which was first applied by El-Shagi and
Jung (2015) to the release of minutes by the Bank of England. This empirical
analysis supports the view that information contained in money and credit
aggregates is used by markets when assessing forthcoming interest changes of
the ECB. First, it shows that, in the short term, markets learn from the ECB’s
regular money and credit data releases and thereby somewhat improve their
expectations of the next interest rate move. Second, it demonstrates that news
on monetary data are immediately priced in by the markets. Third, it shows
that markets systematically obtain clues about the future course of the ECB’s
monetary policy from the broader picture of money and credit indicators con-
tained in the press release.
The present analysis reports results for the sample from the ECB Governing
Council meeting of January 2000December 2014, while also providing evi-
dence for shorter subsamples. The paper is organised as follows. Section II
explains the empirical approach. Section III provides relevant institutional
details and describes the data. Section IV presents empirical results for the
ECB. Section V concludes.
In this section, we present the method of our econometric analysis, which pur-
sues a novel approach first applied by El-Shagi and Jung (2015) to the release
of minutes by the Bank of England. The objective of our empirical analysis,
which uses Ordered Probit models to forecast interest rates on the day before
Scottish Journal of Political Economy
©2017 Scottish Economic Society

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