What does "below, but close to, two per cent" mean? Assessing the ECB's reaction function with real time data
Haavio, Markus; Jalasjoki, Pirkka; Kilponen, Juha; Paloviita, Maritta (01.06.2021)
JulkaisusarjaInternational Journal of Central Banking
Numero2 ; June
Julkaisun pysyvä osoite onhttps://urn.fi/URN:NBN:fi:bof-202002181171
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.
Published in BoF DP 29/2017.