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How does the ECB target inflation?

  • Paolo Surico

    (Bocconi University)

The announced primary objective of the European Central Bank is price stability. While no restrictive reference is given to how the goal should be reached, such a mandate can be thought as a concern to stabilize some relevant macroeconomic aggregates. Accordingly, we frame ECB monetary policy in a general set up that allows policy makers to weight differently positive and negative deviations of inflation and output gaps. The empirical analysis on aggregated Euro area data indicates that ECB monetary policy can be characterized by a nonlinear policy rule. While the objective of price stability is symmetric, the one on real activity is not in that output contractions require larger policy responses. Moreover, the actual Euro interest rate highly commoves with the counterfactual rate that the Bundesbank would have followed if charged to set policy rates for the Euro area.

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File URL: http://econwpa.repec.org/eps/mac/papers/0305/0305005.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0305005.

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Length: 33 pages
Date of creation: 07 May 2003
Date of revision:
Handle: RePEc:wpa:wuwpma:0305005
Note: Type of Document - ; pages: 33; figures: included. ECB working paper No 229
Contact details of provider: Web page: http://econwpa.repec.org

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