What would the ECB have done in the past?

We seek to determine what policy the ECB would have followed from 1999 to 2011 if it had been faced with the same inflation and unemployment rate as since 2021. To find out, we estimate an ECB reaction function, which describes its interest rate-setting policy, over the 1999-2011 period , and extrapolate it over the 2012-2024 period . We seek to determine whether, in the past, the ECB reacted mainly to inflation or mainly to the rise in unit labour costs, which are a leading indicator of core inflation. We find that if the ECB had kept its interest rate-setting behaviour unchanged over the 2012-2024 period, it would have raised interest rates from 2014 to 2018 and kept them between 4. 5% and 6 % from 2019 to 2024. So the ECB did change its behaviour after 2011, adopting a less reactive policy and reacting later and less strongly to inflation and falling unemployment.