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Economic PapersPau Rabanal

Several european politicians have complained that the ECB does not pay enough attention to job creation in the euro area. In this paper, we examine the behavior of the ECB during its first ten years of existence. We review the ECB's legal mandate, and study, using both informal evidence and regression methods, how the ECB reacts to economic conditions in the euro area. We find that despite its legal mandate, which assigns the ECB a primary objective of keeping inflation below 2 percent, the ECB has missed this target most of the time, and reacts to real activity indicators (the output gap and the unemployment rate) when setting the policy rate. Therefore, it is difficult to conclude that the ECB has been hawkish on inflation in its first ten years of existence. Finally, we study what is the optimal monetary policy rule in a model with labor and product market rigidities, and conclude that given these, the ECB should have a dual mandate of price stability and maximum sustainable employment.

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