Friend, Not Foe - Energy Prices and European Monetary Policy

Gökhan Ider, Alexander Kriwoluzky, Frederik Kurcz and Ben Schumann

No 2089, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: This paper first shows that, contrary to conventional wisdom, the European Central Bank (ECB) can influence global energy prices. Second, through Lucas critique-robust counterfactual analysis, we uncover that the ECB’s ability to affect fast-moving energy prices plays an important role in the transmission of monetary policy. Third, we empirically document that, to optimally fulfill its primary mandate, the ECB should swiftly tighten policy in response to an increase in energy prices. Crucially, the tightening required depends on the ECB’s ability to influence global energy prices. Finally, we find this policy strategy could have largely prevented the post-pandemic inflation episode.

Keywords: Inflation; energy prices; monetary policy transmission mechanism (search for similar items in EconPapers)
JEL-codes: C22 E31 E52 Q43 (search for similar items in EconPapers)
Pages: 72 p.
Date: 2024
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-ene and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:diw:diwwpp:dp2089

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