Monetary policy in the euro area: Active or passive?

Alice Albonico, Guido Ascari and Qazi Haque

European Economic Review, 2025, vol. 177, issue C

Abstract: We estimate a medium-scale DSGE model for the euro area from the introduction of the euro to mid-2023, testing for indeterminacy in monetary policy. While the indeterminacy model occasionally fits the data better, this result is fragile and sensitive to technical assumptions, particularly the correlation between sunspot and fundamental shocks. Additionally, inflation responses under indeterminacy contradict standard economic theory and empirical evidence. In contrast, the determinacy model aligns with both theory and empirical data, particularly in response to monetary policy shocks. Our findings support the view that monetary policy in the euro area has been sufficiently active to stabilize inflation and prevent self-fulfilling inflationary expectations.

Keywords: Monetary policy; Indeterminacy; Euro area; Business cycle fluctuations; Inflation (search for similar items in EconPapers)
JEL-codes: C11 C13 E32 E52 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:177:y:2025:i:c:s001429212500100x

DOI: 10.1016/j.euroecorev.2025.105050

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