The awakening of inflation and the return of the Phillips curve in the euro area

Stefano Neri (), Cristina Conflitti () and Alessandro Lin ()
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Stefano Neri: Bank of Italy
Cristina Conflitti: Bank of Italy
Alessandro Lin: Bank of Italy

No 1525, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: During the 2021-22 high-inflation surge, euro-area firms significantly increased the frequency with which they adjusted prices. This paper documents that such a shift in price-setting behaviour led to a transitory steepening of the Phillips curve, which had remained persistently flat throughout the preceding low-inflation period. In a model with nominal rigidities, a higher frequency of price adjustments steepens the Phillips curve and enhances the transmission of monetary policy, enabling central banks to contain cost-push shocks with a smaller loss in output. We provide robust empirical evidence for the euro area using panel local projections, confirming the link between the frequency of price changes, the slope of the Phillips curve in the euro area, and the increased effectiveness of monetary policy.

Keywords: Phillips curve; DSGE model; price setting; monetary policy; panel local projections (search for similar items in EconPapers)
JEL-codes: C22 C23 E27 E31 E52 (search for similar items in EconPapers)
Date: 2026-03
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1525_26

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