Estimating the ECB Loss function

What is it about?

In this paper we estimate the objective function of the European Central Bank (ECB), i.e. the targets and the weights attached by the ECB to those targets. Our main newelty is to do such estimation using data that begins almost 4 years before the actual inception of the European Monetary Union. We do so because we show that the data features a structural break at 1995 and then features a paramount stability through 2002. Indeed, we find 1995 as the start of a notional EMU through a combined analysis of facts, data and literature on European integration. The objective function that we estimate features no significant concern for output stabilization and a target for inflation of 1.6 per cent. Moreover, and as usual, we find that the ECB conducts policy with gradualismo, i.e. with interest-rate smoothing, in the period 1995-2002.

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Photo by Christian Lue on Unsplash

Photo by Christian Lue on Unsplash

Why is it important?

We are the first to estimate the objective function of the European Central Bank. We show that the data indicates that there has been an actual European Monetary Union since 1995. Such data thus confirms facts and literature on european monetary integration. We quantify the inflation target set by the ECB of 'inflation close but below 2 percent', at precisely 1,6 percent.

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