No. 1500 - What drives policy rate expectations? Evidence from the post-pandemic monetary policy cycle
This paper analyses the demand and supply factors that influenced market perceptions and drove revisions in expected ECB and Fed policy rates during the post-pandemic monetary policy cycle. It proposes a novel measure of revisions in expected policy rates and incorporates it into a two-country econometric model designed to distinguish the effects of domestic and international shocks.
The results show that both central banks were perceived as more responsive to inflation than in the past, regardless of its source. The reaction to supply shocks was seen as more similar to the response to demand shocks, reflecting expectations of lower tolerance for supply-driven inflation. Moreover, supply shocks emerged as a new source of international spillovers, significantly influencing ECB policy rate expectations.
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