ECB Reaction Functions and the Crisis of 2008

We estimate a reaction function for the European Central Bank (ECB) using forecasts of economic growth and inflation as regressors. We detect a shift after Lehman Brothers failed in September 2008 when the pre-crisis reaction function indicates that the zero lower bound may become a constraint. We detect a shift back in the second half of 2010, several months prior to the April 2011 rate increase. The interest rate cuts in 2008 were more aggressive than forecast by the pre-crisis reaction function. These findings are compatible with the literature on optimal monetary policy in the presence of a zero lower bound.