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

Published online by Cambridge University Press:  09 December 2021

Robert L. Czudaj
Robert L. Czudaj*
Affiliation:
Department of Mathematics, Computer Science and Statistics, Chair for Statistics and Econometrics, Ludwig-Maximilians-University Munich, D-80799 Munich, Germany Department of Economics and Business, Chair for Empirical Economics, Chemnitz University of Technology, D-09126 Chemnitz, Germany.
*
Email: robert-lukas.czudaj@wirtschaft.tu-chemnitz.de
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Abstract

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.

Keywords

Disagreementexpectationsforecastmonetary policyD84E43E52
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 3 , April 2023 , pp. 698 - 717
Copyright
© The Author(s), 2021. Published by Cambridge University Press

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