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Inflation dynamics and monetary policy in the euro area

Author

Listed:
  • Pierpaolo Benigno
  • Paolo Canofari
  • Giovanni Di Bartolomeo
  • Marcello Messori

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.

Suggested Citation

  • Pierpaolo Benigno & Paolo Canofari & Giovanni Di Bartolomeo & Marcello Messori, 2023. "Inflation dynamics and monetary policy in the euro area," wp.comunite 00161, Department of Communication, University of Teramo.
    • Handle: RePEc:ter:wpaper:00161
    as

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    File URL: https://www.dipecodir.it/wpcom/data/wp_no_161_2023.pdf
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    References listed on IDEAS

    as
    1. Sheedy, Kevin D., 2010. "Intrinsic inflation persistence," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 1049-1061, November.
    2. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-334, June.
    3. Laurence Ball & Daniel Leigh & Prachi Mishra, 2022. "Understanding US Inflation during the COVID-19 Era," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 53(2 (Fall)), pages 1-80.
    4. James H. Stock & Mark W. Watson, 2007. "Why Has U.S. Inflation Become Harder to Forecast?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 3-33, February.
    5. Olivier Blanchard, 2016. "The Phillips Curve: Back to the '60s?," American Economic Review, American Economic Association, vol. 106(5), pages 31-34, May.
    6. James H. Stock & Mark W. Watson, 2007. "Why Has U.S. Inflation Become Harder to Forecast?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 3-33, February.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    inflation; euro area; supply shocks; monetary policy; inflation expectations;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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