Market Predictability of ECB Policy Decisions: A Comparative Examination


Kevin Ross

Publication Date:

December 1, 2002

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate


Many surveys of the ECB's monetary framework emphasize the inability of financial markets to correctly predict monetary policy decisions. At the same time, these surveys of financial market participants have given relatively high marks to the United States Federal Reserve and the Bank of England on their ability to be understood by financial markets. Against this background, this paper examines the ability of financial markets to correctly anticipate these three central bank policy decisions over the first 3½ years of the ECB. The paper relies on calculations that market participants employ in anticipating policy changes and on term structure regressions that provide ex post evidence of market surprises. While the results suggest that all three central banks are broadly predictable, markets have had difficulty anticipating large changes and cuts in ECB policy interest rates. These surprises may be tied to the large number of policy meetings, particular characteristics of the EONIA money market, and the unique circumstances of the ECB. An added factor may be the absence of a consistent policy on communicating the current stance-if any-of the ECB's policy bias on the future direction of interest rates.


Working Paper No. 2002/233



Publication Date:

December 1, 2002



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