Reading between the lines : Uncovering asymmetry in the central bank loss function

Abstract

Central banks prioritise price stability, but whether they dislike high and low inflation equally remains an open question. Applying a wide range of text analysis techniques, we proxy the central bank’s loss by extracting the tone of the central bank’s qualitative communication and combine it with quantitative information in real time to estimate the loss function. We find strong and robust evidence of asymmetry in the case of the European Central Bank during 1999–2021: the slope of the loss function was roughly three times steeper when inflation exceeded the target compared to when it was below the target. This represents a significant departure from the quadratic and symmetric monetary policy loss function typically applied in macro models.