Asymmetric Reaction Functions for the Euro Area

Abstract

This paper o¤ers a preliminary evaluation of ECB conduct of monetary policy by estimating a fairly general reaction function for the Euro area. The speci…cation of the policy rule embodies a number of nonlinearities which are shown to stemm from asymmetric preferences and a convex aggregate supply curve respectively. Asymmetric preferences allow, but do not require, policy makers to weight di¤erently positive and negative deviations of in ‡ation and output from the reference values, and translate into an asymm…