The Preferences of the Euro Area Monetary Policy‐maker

The aim of this article is to uncover the aggregate monetary policy preferences in the euro area. This is pursued under the assumption of optimizing policy behaviour subject to a simple model of the macroeconomic structure, following a procedure proposed recently in the literature in which GMM estimation stems from the optimal control solution to the optimization problem. Instead of waiting for more quarterly data of ECB policy‐making, the sample goes as far back as possible into the pre‐EMU years. Through a combined analysis of facts, data and literature on European integration, 1995 is identified as the start date of a euro area notional policy regime, sustained later by the ECB. The policy preferences are estimated as a loss function with strict inflation targeting at 1.6 per cent and interest‐rate smoothing, in the period 1995–2002.