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Asymmetric Reaction Functions for the Euro Area

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  • Paolo Surico

Abstract

This paper offers a preliminary evaluation of ECB conduct of monetary policy by estimating a fairly general reaction function for the euro area. The specification of the policy rule embodies a number of nonlinearities which are shown to stem from asymmetric preferences and a convex aggregate supply curve. Asymmetric preferences allow, but do not require, policy-makers to weight differently positive and negative deviations of inflation and output from the reference values, and translate into an asymmetric reaction function. The empirical analysis on monthly euro-area aggregated data over the last 5 years reveals that ECB monetary policy is effectively described by a nonlinear policy rule according to which output contractions have required a larger policy response than output expansions. Moreover, actual movements in the euro interest rate closely resemble the simulated path that a Bundesbank-type of behaviour would have implied. Copyright 2003, Oxford University Press.

Suggested Citation

  • Paolo Surico, 2003. "Asymmetric Reaction Functions for the Euro Area," Oxford Review of Economic Policy, Oxford University Press, vol. 19(1), pages 44-57.
  • Handle: RePEc:oup:oxford:v:19:y:2003:i:1:p:44-57
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