Inflation dynamics and monetary policy in the euro area

Pierpaolo Benigno, Paolo Canofari, Giovanni Di Bartolomeo () and Marcello Messori

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Abstract: This paper analyses the inflation surge experienced by the euro area since 2021, exploring its roots in supply-side shocks that have resulted in bottlenecks and an energy crisis. It interprets the persistence of high inflation rates as a result of a pass-through from external shocks and shifting inflation expectations. The high unemployment-inflation sacrifice ratio implies significant costs for reducing inflation through aggregate demand contraction, necessitating a restrictive monetary stance to stabilize inflation expectations. A balanced policy mix is proposed to support a favorable economic scenario with a soft landing and medium-term inflation return to target.

Keywords: inflation; euro area; supply shocks; monetary policy; inflation expectations (search for similar items in EconPapers)
JEL-codes: E31 E52 F41 (search for similar items in EconPapers)
Date: 2023-03
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Persistent link: https://EconPapers.repec.org/RePEc:ter:wpaper:00161

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