Are the Forecasts of Professionals Compatible with the Taylor Rule? Evidence from the Euro Area

This article examines if professional forecasters form their expectations regarding the policy rate of the European Central Bank (ECB) consistent with the Taylor rule. In doing so, we assess micro-level data including individual forecasts for the ECB main refinancing operations rate as well as infla...

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Bibliographic Details
Published in:Macroeconomic dynamics 2023-04, Vol.27 (3), p.698-717
Main Author: Czudaj, Robert L.
Format: Article
Language:English
Subjects:
Crude oil prices
Datasets
Economic theory
Economics
Eurozone
GDP
Gross Domestic Product
Inflation
Inflation rates
Interest rates
Macroeconomics
Monetary policy
Professionals
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Summary:This article examines if professional forecasters form their expectations regarding the policy rate of the European Central Bank (ECB) consistent with the Taylor rule. In doing so, we assess micro-level data including individual forecasts for the ECB main refinancing operations rate as well as inflation and gross domestic product (GDP) growth for the Euro Area. Our results indicate that professionals indeed form their expectations in line with the Taylor rule. However, this connection has diminished over time, especially after the policy rate hit the zero lower bound. In addition, we also find a relationship between forecasters’ disagreement regarding the policy rate of the ECB and disagreement on future GDP growth, which disappears when controlling for monetary policy shocks proxied by changes in the policy rate in the quarter the forecasts are made.
ISSN:1365-1005
1469-8056
DOI:10.1017/S1365100521000614