Determinants of the ECB’s success to reach its inflation target

Abstract

The European Central Bank (ECB) implemented a monetary policy strategy that quantitatively defined price stability as “below but close to 2 %” from 2003 to 2021. In July 2021, it adopted a new monetary policy strategy, committing to an inflation target of 2 % with a symmetric treatment of deviations. This study implicitly analyzes the performance of the previous strategy in achieving price stability by identifying the key determinants that influence inflation deviations from the target. Methodologically, we apply the nonstationary ordered probit model, which allows the estimation of marginal effects of covariates on the probability of the inflation rate being below, in, or above the assumed target range. The results indicate that the crucial determinants of deviation in the inflation rate from the target range are fundamental macroeconomic variables, some of which are indirectly under the control of the ECB. While the inflation rate has occasionally deviated from the target range, the overall conclusion is that the performance of the ECB in fulfilling the primary goal defined in the monetary policy strategy is still manageable.