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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
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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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