Monetary policy in the Euro Area, when Phillips curves... are curves (Guido Ascari, Alexandre Carrier, Emanuel Gasteiger, Alex Grimaud, Gauthier Vermandel)

Guido Ascari, Alexandre Carrier, Emanuel Gasteiger, Alex Grimaud () and Gauthier Vermandel
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Guido Ascari: De Nederlandsche Bank
Alexandre Carrier: European Central Bank
Emanuel Gasteiger: TU Wien
Alex Grimaud: Oesterreichische Nationalbank
Gauthier Vermandel: Banque de France

Working Papers from Oesterreichische Nationalbank (Austrian Central Bank)

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 (NK) model with endogenous adjustment of price and wage setting frequencies, moving beyond the quasilinear structure of standard nonlinear NK Phillips curves (NKPC). 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 andwages for monetary policy. Unlike conventional models, our framework does not attribute inflation dynamics primarily to exogenous supply shocks. Instead, the impact of shocks depends 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)
Pages: 60
Date: 2025-12-09
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