Quantifying the ECB’s Interest Rate Smoothing Behavior

Abstract

Against the background of the recent discussion whether the smoothing behavior of the Fed detected by empirical Taylor rules is indeed a fact or rather a statistically fiction, this paper re-examines the empirical evidence for interest rate smoothing for the case of the ECB. Based on data representing true ECB behavior, our findings reject the hypothesis of no smoothing but also find a role of serially correlated shocks. The degree of smoothing is estimated in the range of [0:40;0:82], reflecting model uncertainty with respect to the output gap and indicating a rather moderate extent of partial adjustment. Moreover, we find a significant reaction to the output gap. In contrast, the reaction coefficient for current inflation is insignificant, while it is highly significant for the one-year-ahead forecast of the ECB’s Survey of Professional Forecasters.