The ECB Monetary Policy and the Current Financial Crisis

Our paper presents estimates of Taylor type rules for the euro area using quarterly data for the period 2004(Q4) to 2008(Q3). Unlike other studies, we employ a real-time data set using the quarterly ECB staff projections on inflation and output growth. Estimated realtime rules are also compared with a more conventional specification whereby ex-post data are employed. Our results suggest that: (i) the ECB monetary policy strategy can be represented with a simple interest-rate rule; (ii) the ECB takes into account the quarterly ECB staff projections when deciding on its monetary policy stance; (iii) the accommodative behaviour of the ECB often cited in the literature is related to differences between real-time and ex-post data; and (iv) the estimated simple interest-rate rule continues to capture the ECB monetary policy strategy during the recent financial crisis. In light of the above, we can draw three important policy conclusions. First, the ECB has a stabilising role in the economy. Second, the ECB has become rather hawkish in its monetary policy decision making, responding more to projected changes in inflation than to projected changes in the output growth gap. Finally, the ECB’s response during the recent financial crisis of reducing its interest rate to 1.00% by the first half of 2009 and undertaking non-standard measures to provide support to the financial sector is shown to be equivalent to following a simple interest-rate rule based on its previous practices.Taylor type rules, ECB monetary policy, real-time data, financial crisis

Mortgage Debt, Social Customs,and Financial Innovation

Although housing can be a powerful channel of monetary policy transmission this channel can be weakened by social customs and financial liberalization as well as accompanying innovation that create alternatives to bank mortgages controlled by a central bank. This paper utilizes some unique questions in the 1999 and 2002 Cyprus Surveys of Consumer Finances, as well as data from the 1998 and 2001 US Surveys of Consumer Finances, in order to study the role of social customs (in the form of parental housing gifts) and financial liberalization for the incidence of homeownership rates, mortgage debt and borrowing constraints. Unlike existing studies of financially developed countries, the data from the Cyprus Surveys suggest that only a very small proportion of Cypriot households are credit constrained and that a number of important economic characteristics of the household are irrelevant for homeownership and for the use of mortgages. Our findings suggest that the presence of such customs may interfere with the monetary transmission mechanism by limiting the sensitivity of housing investment to changes in credit market conditions. Financial liberalization leading to innovation could work in the opposite direction if it leads to increased household participation in formal loans controlled by the central bank.Homeownership, social customs, financial liberalization, monetary policy