Monetary policy in the Euro Area, when Phillips curves... are curves

Guido Ascari, Alexandre Carrier, Emanuele Gasteiger, Alex Grimaud and Gauthier Vermandel

Working Papers from DNB

Abstract: We study monetary policy in an environment where price and wage Phillips curves exhibit true curvature. To this end, we propose a New Keynesian model with endoge-nous adjustment of price and wage setting frequencies, moving beyond the quasi-linear structure of standard nonlinear NK Phillips curves. Using euro area data from 1999Q1 to 2024Q4, we estimate and simulate the non-linear model, analyzing the recent inflation surge and the implications of state-dependent prices and wages for monetary policy. Unlike conventional models, our framework does not attribute inflation dynamics pri-marily to exogenous supply shocks. Instead, the impact of shocks is asymmetric and de-pends on their timing, size, and the business cycle. Consequently, the inflation–output stabilization trade-off is state-dependent: monetary policy is more effective in curbing inflation, and supply shocks have larger effects during periods of high inflation.

Keywords: New Keynesian Phillips Curve; non-linearity; inflation; monetary policy (search for similar items in EconPapers)
JEL-codes: C51 E31 E47 E52 (search for similar items in EconPapers)
Date: 2026-05
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Persistent link: https://EconPapers.repec.org/RePEc:dnb:dnbwpp:861

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