Forecast Targeting and Financial Stability: Evidence from the European Central Bank and Bank of England

Finance Research Letters, Volume 51, January 2023

ClaudiaCuriaLucia MilenaMurgiab

a Free University of Bolzano-Bozen, Faculty of Economics and Management, Piazza Università-Universitätsplatz 1, I-39100 Bolzano-Bozen, Italy
b University of East Anglia, Norwich Business School, Earlham Rd, Norwich NR4 7TJ, UK

Received 20 July 2022, Revised 12 October 2022, Accepted 8 November 2022, Available online 12 November 2022, Version of Record 17 November 2022.

ABSTRACT

This paper investigates whether financial markets stability matters in setting monetary policy in the case of the European Central Bank and Bank of England. We show that our Tri-mandate Taylor rule better explains the deviations of the observed policy rate from the implied interest rates for both central banks. The forward-looking version shows that the monetary policy conducted by the ECB is largely affected by the US financial market stability, while only the domestic financial market stability affects the BOE. Lastly, we show that the preferences of monetary policy makers have shifted in the aftermath of the 2008 financial crisis.