New insights into the nonlinearity of the ECB Taylor Rule

We apply a non-parametric procedure, Multiple Adaptive Regression Splines (MARS), to endogenously select the best multiple threshold model for the European Central Bank (ECB) Taylor Rule (TR). MARS offers the advantage of not excluding simpler models if they better fit the data. On monthly data from 1/2000 to 9/2016, the TR exhibits thresholds for both the output gap and inflation and uncover interesting information about the different sensitivities of the ECB to each variable. We conclude that the ECB cares more about the economic activity than officially declared and reacts to inflation deviations only if they sufficiently exceed the official 2% target. We also detect an overall shift in the monetary policy during the 2008 financial crisis that pushed the system towards the Zero Lower Bound (ZLB). We reach a more complete description of the ECB TR than published so far.