Determinants of ECB monetary policy : Taylor rule, crisis, interdependence and sentiment analysis

Abstract

This paper examines if the European Central Bank behavior can be estimated by a single reaction function as the monetary policy of the European Union was not unified before 1999. For this purpose, we inspect whether a Taylor rule that is augmented by the exchange rate can be used to describe the behavior of the European Central Bank over the course of four phases starting from 1999 until 2017. We also pay particular attention to the possible interdependence of the Federal Reserves in conjunction with the financial crisis on the behavior of the ECB. After running the regressions, we conduct a sentiment analysis on ECB communications pertaining to the interest rate setting policy.