Monetary policy strategies to navigate post-pandemic inflation: an assessment using the ECB’s New Area-Wide Model

Matthieu Darracq Paries, Antoine Kornprobst and Romanos Priftis

No 2935, Working Paper Series from European Central Bank

Abstract: We assess the effectiveness of ECB monetary policy in the post-pandemic period using a state-of-the-art estimated DSGE model of the euro area. Through counterfactual experiments varying the timing of interest rate hikes, policymaker preferences, and optimality criteria, we compare alternative strategies against actual policy. The ECB’s decision to begin hiking the policy rate in 2022:Q3 effectively balanced inflation and output stabilization, leading to a brief slowdown and inflation converging to target by end-2025. An earlier hike in 2021:Q4 would have reduced peak inflation but caused a prolonged recession, while a delayed hike to 2024:Q1 would have fueled persistent inflation above 4% until 2026. Optimal policy simulations indicate that a more aggressive tightening could have lowered inflation volatility only at the cost of deeper contractions in GDP. Real-time monetary policy counterfactuals confirm that actual policy closely aligned with optimal prescriptions, effectively managing the trade-off between inflation and growth. JEL Classification: C53, E31, E42, E52, E58

Keywords: dual mandate; estimated DSGE model; euro area; monetary policy frameworks; optimal policy (search for similar items in EconPapers)
Date: 2024-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-eec and nep-mon
Note: 604093
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2935~639250ee2b.en.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20242935

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().