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

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.