Monetary Policy during the Energy Price Crisis: ECB Could Have Contained Inflation Earlier

Gökhan Ider, Alexander Kriwoluzky, Frederik Kurcz and Ben Schumann

DIW Weekly Report, 2024, vol. 14, issue 40/41/42, 241-247

Abstract: Following the end of the coronavirus pandemic, the European Central Bank (ECB) was confronted with an unprecedented increase in energy prices. This led to consumer price inflation in the euro area far beyond the ECB’s inflation target of two percent, at times up to 10 percent. At the same time, the euro area economy was threatened by a recession, which resulted in the ECB facing conflicting objectives of stabilizing the economy and combating inflation. Estimates show that while the ECB’s policy strategy of maintaining a low level of interest rates did improve the economy, it also exacerbated the rise in energy prices. The empirical analysis demonstrates that an interest rate hike at the beginning of the energy crisis would have stabilized inflation more effectively. Tightening monetary policy would have curbed energy demand and caused the euro to appreciate, which would have led to a more rapid decline in energy prices. In this counterfactual scenario, the euro area would have had to endure a brief recession, but the overall economic situation would have stabilized by the fourth quarter of 2023. The ECB would likely have been better able to follow its price stability mandate if a capital markets and fiscal union existed in the euro area.

Keywords: monetary policy; inflation; energy prices; optimal policy (search for similar items in EconPapers)
JEL-codes: C32 E31 E52 Q43 (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.diw.de/documents/publikationen/73/diw_01.c.918091.de/dwr-24-40-1.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:diw:diwdwr:dwr14-40-1

Access Statistics for this article

DIW Weekly Report is currently edited by Tomaso Duso, Marcel Fratzscher, Peter Haan, Claudia Kemfert, Alexander Kritikos, Alexander Kriwoluzky, Stefan Liebig, Lukas Menkhoff, Karsten Neuhoff, Carsten Schröder, Katharina Wrohlich and Sabine Fiedler

More articles in DIW Weekly Report from DIW Berlin, German Institute for Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by Bibliothek ().