Dancing on the edge of stagflation

Paolo Canofari, Giovanni Di Bartolomeo () and Marcello Messori

No 231, Working Papers in Public Economics from Department of Economics and Law, Sapienza University of Roma

Abstract: The European Central Bank (ECB) is facing a dangerous trade-off between the control of supply-led inflation and the need to avoid a further recession in the euro area. The paper argues that an effective ECB monetary strategy to handle this trade-off would have been to anticipate the increase in the policy interest rates and postpone the end of the asset net purchase programs. Unfortunately, the ECB did not follow this sequence, which is why its current monetary policy, bound in a tricky balance, risks favoring euro-area stagflation and financial market fragmentation. Moreover, the new anti-fragmentation instrument (TPI) introduced by the ECB appears ineffective and subject to excessive discretion. Therefore, the ECB should instead activate a compelling combination of its rules-based monetary policy with EU centralized and national fiscal policies.

Keywords: Stagflation; monetary policy; ECB (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 (search for similar items in EconPapers)
Pages: 25
Date: 2022-11
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
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Working Paper: Dancing on the edge of stagflation (2022)
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