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In the euro area, monetary policy is conducted by a single central bank for 20 member countries. However, countries are heterogeneous in their economic development, including their inflation rates. This paper combines a New Keynesian model and a neural network to assess whether the European Central Bank (ECB) conducted monetary policy between 2002 and 2022 according to the weighted average of the inflation rates within the European Monetary Union (EMU) or reacted more strongly to the inflation rate developments of certain EMU countries. The New Keynesian model first generates data which is used to train and evaluate several machine learning algorithms. They authors find that a neural network performs best out-of-sample. They use this algorithm to generally classify historical EMU data, and to determine the exact weight on the inflation rate of EMU members in each quarter of the past two decades. Their findings suggest disproportional emphasis of the ECB on the inflation rates of EMU members that exhibited high inflation rate volatility for the vast majority of the time frame considered (80%), with a median inflation weight of 67% on these countries. They show that these results stem from a tendency of the ECB to react more strongly to countries whose inflation rates exhibit greater deviations from their long-term trend.

In the euro area, monetary policy is conducted by a single central bank for 19 member countries. However, countries are heterogeneous in their economic development, including their inflation rates. This paper combines a New Keynesian model and a neural network to assess whether the European Central Bank (ECB) conducted monetary policy between 2002 and 2022 according to the weighted average of the inflation rates within the European Monetary Union (EMU) or reacted more strongly to the inflation rate developments of certain EMU countries. The New Keynesian model first generates data which is used to train and evaluate several machine learning algorithms. We find that a neural network performs best out-of-sample. Thus, we use this algorithm to classify historical EMU data. Our findings suggest disproportional emphasis on the inflation rates experienced by southern EMU members for the vast majority of the time frame considered (80%). We argue that this result stems from a tendency of the ECB to react more strongly to countries whose inflation rates exhibit greater deviations from their long-term trend.

Due to its official mandate, the European Central Bank (ECB) is assumed to maximize an implied objective function that leads it to pursue inflation with a subordinate focus on supporting the general economic policy of the European Union. This objective is – by its very nature – difficult to quantify. My paper tries to decipher information regarding the ECB's objective through the use of text mining on all public speeches between 2002 and 2020. The estimation of a sentiment index through a 'bag-of-words'-approach yields the following results. First, the findings of my analysis suggest a concave objective regarding the inflation rate. The implied inflation target is best summarized as an inflation rate of 'above, but close to 2%'. Deviations from this target lead to a reduction in the sentiment of the institutions' communication. Second, my findings suggest a convex objective towards output growth and a linear objective towards the unemployment rate, with a preference for higher GDP growth and employent independently of the current level. Furthermore, the hierarchical order in the the European Central Bank (ECB)'s mandate does not always appear to be consistent with my findings. Deviations from its primary objective, the inflation rate, appear to be of no greater concern than deviations in its subordinate objective. Third, in periods of heightened uncertainty, there is an additional decrease in the sentiment of speech. Last, over the last two decades, speeches have become more pessimistic, even when controlling for macroeconomic conditions.

This paper analyzes the interest rate setting of the European Central Bank (ECB) both before and after the outbreak of the global financial crisis. In the current monetary policy literature, researchers typically select one Taylor rule-based model in order to analyze the interest rate setting of central banks, but neglect uncertainty about the choice of this respective model. We apply a Bayesian model averaging (BMA) approach to extend the standard Taylor rule to account for model uncertainty driven by heterogeneity in the ECB decision-making body, the governing council. Our results suggest the following: First, the ECB acts according to its official mandate to maintain price stability and therefore to focus its decisions on the inflation rate. Second, economic activity measures have been in the focus of the ECB before the financial crisis broke out. Third, over the last decade, the role of economic activity for ECB monetary policy has decreased so that inflation seems to be the main driver of monetary policy decisions. Fourth, central bankers appear to consider more than one model when they decide about monetary policy measures.