Inflation dynamics and monetary policy in the euro area

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

No 161, CIMEO, Sapienza University of Rome from Department of Economics and Law, Sapienza University of Rome

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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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ter:wpaper:00161

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