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Indicators of monetary policy stance and financial conditions: an overview
The article discusses different indicators that can be used by central banks, market participants, and other economic agents to evaluate the monetary policy stance at each moment in time. This discussion considers that monetary policy aims at stabilizing the economy, and the position of the underlying indicators along to the business cycle are an indication of its stance. First, we describe some simple monetary policy rules and examine how unconventional measures and the lower bound on interest rates could be taken into account in assessing monetary policy stance through balance-sheet and shadow rates approaches. Second, we discuss how financial conditions can be assessed using disaggregated data as well as composite indicators.We also develop and estimate financial conditions indices for the euro area, the four largest economies, and Portugal. Overall, the set of indicators presented in the article is helpful in both supporting the policy decision and in understanding central banks’ reaction function. However, these indicators alone are not able to fully rationalize the monetary policy decisions since policy makers’ interpretation and judgment play a crucial role in the decision process.