Reading between the Lines: Using Text Analysis to Estimate the Loss Function of the ECB

48 Pages Posted: 14 Jan 2021 Last revised: 18 Nov 2021

See all articles by Maritta Paloviita

Maritta Paloviita

Bank of Finland - Research

Markus Haavio

Bank of Finland - Research

Pirkka Jalasjoki

Bank of Finland - Research

Juha Kilponen

Bank of Finland - Research

ilona vänni

Bank of Finland

Date Written: July 6, 2020

Abstract

We apply textual analysis to extract the tone (sentiment) from the introductory statements to the ECB’s press conferences regarding economic outlook. By combining this information with Eurosystem/ECB staff macroeconomic projections, we are able to directly estimate the Governing Council’s loss function. Our analysis suggests that prior to the new monetary policy strategy announced in July 2021, the de facto inflation aim of the ECB may have been considerably below 2%. We also find evidence that the loss function has been asymmetric, which would mean that the ECB has been more averse to inflation above 2% than below 2%. The ECB’s new definition of price stability implies a symmetric loss function with a bliss point at 2.0%. Hence our results indicate that the new strategy will bring about a clear change in the Governing Council’s policy preferences.

Keywords: central bank communication, ECB, monetary policy, textual analysis, inflation target, real time projections, loss function

JEL Classification: E31, E52, E58

Suggested Citation

Paloviita, Maritta and Haavio, Markus and Jalasjoki, Pirkka and Kilponen, Juha and vänni, ilona, Reading between the Lines: Using Text Analysis to Estimate the Loss Function of the ECB (July 6, 2020). Bank of Finland Research Discussion Paper No. 12/2020, Available at SSRN: https://ssrn.com/abstract=3764717

Maritta Paloviita (Contact Author)

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland
+358 9 1831 (Phone)
+358 9 1832560 (Fax)

Markus Haavio

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

Pirkka Jalasjoki

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

Juha Kilponen

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland
+358 10 831 2847 (Phone)
+358 10 831 2294 (Fax)

HOME PAGE: http://www.bof.fi/en/suomen_pankki/organisaatio/asiantuntijoita/kilponen_juha/

Ilona Vänni

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

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