The preferences of the euro area monetary policy-maker

Abstract:

The aim of this article is to uncover the aggregate monetary policy preferences in the euro area. This is pursued under the assumption of optimizing policy behaviour subject to a simple model of the macroeconomic structure, following a procedure proposed recently in the literature in which GMM estimation stems from the optimal control solution to the optimization problem. Instead of waiting for more quarterly data of ECB policy-making, the sample goes as far back as possible into the pre-EMU years. Through a combined analysis of facts, data and literature on European integration, 1995 is identified as the start date of a euro area notional policy regime, sustained later by the ECB. The policy preferences are estimated as a loss function with strict inflation targeting at 1.6 per cent and interest-rate smoothing, in the period 1995-2002.

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