Effects of Monetary Policy Decisions on Professional Forecasters’ Expectations and Expectation Uncertainty

Abstract

In this paper, we examine how professional forecasters’ expectations and expectation uncertainty have reacted to the ECB’s interest rate and non-conventional monetary policy decisions during the period 1999-2017. The analysis makes use of a conventional intervention dummy -type set up. The results indicate that expectations have been sensitive to policy actions, but forecasters’ reactions are quite different and, as a rule, do not seem to follow the predictions of a standard New Keynesian model. Also the relationship between inflation and output forecasts does not seem to follow a Phillips curve relationship. Rather, the forecasters interpret policy actions as signals of ECB’s inside information. Thus, for instance, cuts in policy rates are interpreted as the CB’s information of worse than generally assumed cyclical situation rather than the eventual positive effects of lower interest rates. The magnitude of expectation effects depends much of the way in which other macro variables are controlled. Even so the basic feature of these effects remain the same.