Has ECB communication been helpful in predicting interest rate decisions? An evaluation of the early years of the Economic and Monetary Union

We examine the usefulness of communication by the European Central Bank for predicting its policy decisions during the early years of the European Economic and Monetary Union. Using ordered probit models based on the Taylor rule, we find that statements on the main refinancing rate and future inflation are significantly related to interest rate decisions. At the same time, an out-of-sample evaluation shows that communication-based models do not outperform models based on macroeconomic data in predicting decisions. Both types of models have difficulty in predicting changes in the main refinancing rate.