Journal Article

Asymmetric Reaction Functions for the Euro Area

Paolo Surico

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 19, issue 1, pages 44-57
Published in print March 2003 | ISSN: 0266-903X
Published online March 2003 | e-ISSN: 1460-2121 | DOI: http://dx.doi.org/10.1093/oxrep/19.1.44
Asymmetric Reaction Functions for the Euro Area

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  • Economic Development and Growth
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This paper offers a preliminary evaluation of ECB conduct of monetary policy by estimating a fairly general reaction function for the euro area. The specification of the policy rule embodies a number of nonlinearities which are shown to stem from asymmetric preferences and a convex aggregate supply curve. Asymmetric preferences allow, but do not require, policy‐makers to weight differently positive and negative deviations of inflation and output from the reference values, and translate into an asymmetric reaction function. The empirical analysis on monthly euro‐area aggregated data over the last 5 years reveals that ECB monetary policy is effectively described by a nonlinear policy rule according to which output contractions have required a larger policy response than output expansions. Moreover, actual movements in the euro interest rate closely resemble the simulated path that a Bundesbank‐type of behaviour would have implied.

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Subjects: Economic Development and Growth ; Public Economics ; Political Economy ; Public Policy

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