What Does "Below, but Close to, 2 Percent" Mean? Assessing the ECB's Reaction Function with Real-Time Data

Maritta Paloviita, Markus Haavio, Pirkka Jalasjoki and Juha Kilponen
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Maritta Paloviita: Bank of Finland
Markus Haavio: Bank of Finland
Pirkka Jalasjoki: Bank of Finland

International Journal of Central Banking, 2021, vol. 17, issue 2, 125-169

Abstract: Using unique real-time quarterly macroeconomic projections of the Eurosystem/ECB staff, we estimate competing specifications of the ECB's monetary policy reaction function. We consider specifications which include inflation and output growth projections, a past inflation gap, a time-varying natural real interest rate, and different inflation targets. Our first key finding is that the de facto inflation target of the ECB lies between 1.6 percent and 1.8 percent. Our second key finding is that the ECB reacts both to short-term macroeconomic projections and to past deviations of inflation from its de facto target.

JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (14)

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