An Analysis of the ECB's Response with Interest Rate Policy Tools During Crisis Periods Over the Past 20 Years and Its Economic Implications

Abstract

This research study aims at identifying the crisis periods in the Euro zone by using the major deviations from the ECB's inflation target and seeing whether the ECB's interventions using the interest rate instrument in different crisis periods were successful in achieving the ECB's target inflation rate of 2% in four different crisis periods with different dynamics. For more accurate results, we use all 20 eurozone countries and their quarterly data. We collected ECB interest rates and inflation data for each eurozone country between 2004 and 2023. To test our hypothesis, we conducted empirical analysis using a panel data regression model. First and foremost, we detect four different crisis periods by using the major deviations from the ECB's inflation target, which are the 2008 global financial crisis, the 2011 European debt crisis, the 2019 COVID-19 crisis, and the 2022 energy crisis following Russia's invasion of Ukraine. Secondly, we benefited from data before the effects of the crisis emerged, data during the crisis processes, and data during the period when the effects of the crisis started to disappear.