Energy and Monetary Policy in the Euro Area

Alice Albonico, Guido Ascari, Qazi Haque, Kostas(Konstantinos) Mavromatis and Andra Smadu ()
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Andra Smadu: De Nederlandsche Bank

Adelaide Economics Working Papers from Adelaide University, School of Economics

Abstract: We develop and estimate an open economy DSGE model for the euro area where global energy prices and the exchange rate jointly determine domestic inflation, because imported energy, priced in foreign currency, enters both consumption and production. Energy and exchange-rate disturbances account for the bulk of short-run volatility in headline euro area inflation, with energy price shocks driving most of the post-pandemic surge. Because energy and non-energy goods are poor substitutes, an adverse energy price shock raises import values, deteriorating the trade balance and depreciating the real exchange rate through the net-foreign-asset and UIP channels. The exchange-rate channel strengthens monetary transmission and improves the short-run inflation-output trade-off relative to a non-energy economy. Optimal policy can exploit this channel rather than looking through energy price shocks. The case for looking through such shocks becomes stronger when the central bank assigns a greater weight to output gap stabilization and prices become stickier.

Keywords: Monetary policy; Inflation; Energy; Bayesian estimation (search for similar items in EconPapers)
Date: 2026-06
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Working Paper: Energy and Monetary Policy in the Euro Area (2026)
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Persistent link: https://EconPapers.repec.org/RePEc:adl:wpaper:2026-07

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