Central Bank Communication and the Perception of Monetary Policy by Financial Market Experts


  • An earlier version of the paper circulated under the title “Why Do Financial Market Experts Misperceive Future Monetary Policy Decisions?” Support by the Deutsche Forschungsgemeinschaft (DFG) through CRC 649 “Economic Risk” is gratefully acknowledged. We thank Puriya Abbassi, Michael Ehrmann, Frieder Mokinski, Andreas Schrimpf, and Michael Schröder for helpful comments and suggestions. The paper highly benefited from the reports of two referees and the presentations at the Bank of Portugal, the Study Center Gerzensee, the EEA meeting 2010 in Glasgow, and the ECB-Conference on Monetary Policy and Financial Stability in Amsterdam. Andreas Klösel provided valuable research assistance.


This paper investigates how financial experts perceive the monetary policy of the European Central Bank (ECB). Assuming a Taylor-rule-type reaction function, we use qualitative survey expectations about future interest rates, inflation, and output to discover the sources of individual interest rate forecast errors. Based on a panel random coefficient model, we show that financial experts have systematically misperceived the ECB’s interest rate rule. While perception of monetary policy regarding inflation has become more accurate since the ECB’s clarification of the monetary policy strategy in 2003, misperception regarding the ECB’s reaction to output has increased in the financial crisis.