IDEAS home Printed from https://ideas.repec.org/p/zbw/safepl/310334.html
   My bibliography  Save this paper

Key challenges for monetary policy

Author

Listed:
  • Haselmann, Rainer
  • Heider, Florian
  • Pelizzon, Loriana
  • Weber, Michael

Abstract

Monetary policy in the euro area faces significant challenges due to the evolving economic landscape marked by the return of inflation, financial instability risks, and the consequences of unconventional monetary policy (UMP) to the operational framework of monetary policy. This article evaluates these key challenges in the context of the European Central Bank's (ECB) mandate and its broader implications. It highlights the unprecedented resurgence of inflation, which has complicated monetary policy decisions and revealed gaps in understanding household inflation expectations. Financial stability, now integral to the ECB's mandate, is strained by trade-offs between short-term and long-term stability, particularly under high-interest rate environments. Finally, UMP has disrupted traditional financial mechanisms and increased dependency on the central bank's liquidity operations.

Suggested Citation

  • Haselmann, Rainer & Heider, Florian & Pelizzon, Loriana & Weber, Michael, 2025. "Key challenges for monetary policy," SAFE Policy Letters 106, Leibniz Institute for Financial Research SAFE.
    • Handle: RePEc:zbw:safepl:310334
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/310334/1/1916760058.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Crosignani, Matteo & Faria-e-Castro, Miguel & Fonseca, Luís, 2020. "The (Unintended?) consequences of the largest liquidity injection ever," Journal of Monetary Economics, Elsevier, vol. 112(C), pages 97-112.
    2. Francesco D’Acunto & Daniel Hoang & Michael Weber, 2022. "Managing Households’ Expectations with Unconventional Policies," The Review of Financial Studies, Society for Financial Studies, vol. 35(4), pages 1597-1642.
    3. Florian Heider & Farzad Saidi & Glenn Schepens, 2019. "Life below Zero: Bank Lending under Negative Policy Rates," The Review of Financial Studies, Society for Financial Studies, vol. 32(10), pages 3728-3761.
    4. Michael Weber & Francesco D'Acunto & Yuriy Gorodnichenko & Olivier Coibion, 2022. "The Subjective Inflation Expectations of Households and Firms: Measurement, Determinants, and Implications," Journal of Economic Perspectives, American Economic Association, vol. 36(3), pages 157-184, Summer.
    5. Del Negro, Marco & Sims, Christopher A., 2015. "When does a central bank׳s balance sheet require fiscal support?," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 1-19.
    6. Itamar Drechsler & Alexi Savov & Philipp Schnabl, 2021. "Banking on Deposits: Maturity Transformation without Interest Rate Risk," Journal of Finance, American Finance Association, vol. 76(3), pages 1091-1143, June.
    7. Olivier Coibion & Yuriy Gorodnichenko & Michael Weber, 2022. "Monetary Policy Communications and Their Effects on Household Inflation Expectations," Journal of Political Economy, University of Chicago Press, vol. 130(6), pages 1537-1584.
    8. Jean-Charles Rochet & Jean Tirole, 1996. "Interbank lending and systemic risk," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 733-765.
    9. Pelizzon, Loriana & Subrahmanyam, Marti G. & Tomio, Davide & Uno, Jun, 2016. "Sovereign credit risk, liquidity, and European Central Bank intervention: Deus ex machina?," Journal of Financial Economics, Elsevier, vol. 122(1), pages 86-115.
    10. Carpinelli, Luisa & Crosignani, Matteo, 2021. "The design and transmission of central bank liquidity provisions," Journal of Financial Economics, Elsevier, vol. 141(1), pages 27-47.
    11. Francesco D’Acunto & Ulrike Malmendier & Juan Ospina & Michael Weber, 2021. "Exposure to Grocery Prices and Inflation Expectations," Journal of Political Economy, University of Chicago Press, vol. 129(5), pages 1615-1639.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:ecb:ecbdps:202424 is not listed on IDEAS
    2. Michael Weber, 2022. "Subjective inflation expectations of households," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 57(4), pages 217-221, October.
    3. Crump, Richard K. & Eusepi, Stefano & Tambalotti, Andrea & Topa, Giorgio, 2022. "Subjective intertemporal substitution," Journal of Monetary Economics, Elsevier, vol. 126(C), pages 118-133.
    4. Schnorpfeil, Philip & Weber, Michael & Hackethal, Andreas, 2023. "Households' response to the wealth effects of inflation," SAFE Working Paper Series 400, Leibniz Institute for Financial Research SAFE.
    5. Carletti, Elena & De Marco, Filippo & Ioannidou, Vasso & Sette, Enrico, 2021. "Banks as patient lenders: Evidence from a tax reform," Journal of Financial Economics, Elsevier, vol. 141(1), pages 6-26.
    6. Viral V. Acharya & Matteo Crosignani & Tim Eisert & Christian Eufinger, 2023. "How Do Supply Shocks to Inflation Generalize? Evidence from the Pandemic Era in Europe," NBER Working Papers 31790, National Bureau of Economic Research, Inc.
    7. Ding Dong & Zheng Liu & Pengfei Wang & Min Wei, 2024. "Inflation Disagreement Weakens the Power of Monetary Policy," Working Paper Series 2024-27, Federal Reserve Bank of San Francisco.
    8. Fudulache, Adina-Elena & Goetz, Martin R., 2023. "Long-term deposit funding and demand for central bank funds: Evidence from targeted longer-term refinancing operations," Discussion Papers 12/2023, Deutsche Bundesbank.
    9. Becker, Christoph & Dürsch, Peter & Eife, Thomas A. & Glas, Alexander, 2023. "Households' probabilistic inflation expectations in high-inflation regimes," ZEW Discussion Papers 23-072, ZEW - Leibniz Centre for European Economic Research.
    10. policy, Work stream on macroprudential & Albertazzi, Ugo & Martin, Alberto & Assouan, Emmanuelle & Tristani, Oreste & Galati, Gabriele & Vlassopoulos, Thomas, 2021. "The role of financial stability considerations in monetary policy and the interaction with macroprudential policy in the euro area," Occasional Paper Series 272, European Central Bank.
    11. Michael Weber & Yuriy Gorodnichenko & Olivier Coibion, 2023. "The Expected, Perceived, and Realized Inflation of US Households Before and During the COVID19 Pandemic," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 71(1), pages 326-368, March.
    12. Ahn, Hie Joo & Xie, Shihan & Yang, Choongryul, 2024. "Effects of monetary policy on household expectations: The role of homeownership," Journal of Monetary Economics, Elsevier, vol. 147(C).
    13. Peter Andre & Ingar Haaland & Christopher Roth & Mirko Wiederholt & Johannes Wohlfart, 2021. "Narratives about the Macroeconomy," ECONtribute Discussion Papers Series 127, University of Bonn and University of Cologne, Germany.
    14. Pascal Büsing & Henning Cordes & Thomas Langer, 2023. "How the provision of inflation information affects pension contributions: A field experiment," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 90(3), pages 633-666, September.
    15. Christian Bittner & Alexander Rodnyansky & Farzad Saidi & Yannick Timmer, 2021. "Mixing QE and Interest Rate Policies at the Effective Lower Bound: Micro Evidence from the Euro Area," CESifo Working Paper Series 9363, CESifo.
    16. Lena Dräger & Klaus Gründler & Niklas Potrafke, 2022. "Political Shocks and Inflation Expectations: Evidence from the 2022 Russian Invasion of Ukraine," ifo Working Paper Series 371, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    17. Tom Beernaert & Nicolas Soenen & Rudi Vander Vennet, 2023. "ECB Monetary Policy and the Term Structure of Bank Default Risk," JRFM, MDPI, vol. 16(12), pages 1-22, December.
    18. Carola Conces Binder & Rupal Kamdar & Jane M. Ryngaert, 2024. "Partisan Expectations and COVID-Era Inflation," NBER Chapters, in: Inflation in the COVID Era and Beyond, National Bureau of Economic Research, Inc.
    19. Michelangeli, Valentina & Piersanti, Fabio Massimo, 2023. "Interdependence between assets and liabilities in the banking system: Changes in the last two decades," Finance Research Letters, Elsevier, vol. 58(PA).
    20. Michal Marencak, 2023. "State-dependent inflation expectations and consumption choices," Working and Discussion Papers WP 10/2023, Research Department, National Bank of Slovakia.
    21. policy, Work stream on macroprudential & Policy, Monetary & Stability, Financial & Albertazzi, Ugo & Martin, Alberto & Assouan, Emmanuelle & Tristani, Oreste & Galati, Gabriele & Vlassopoulos, Thomas , 2023. "The role of financial stability considerations in monetary policy and the interaction with macroprudential policy in the euro area," Occasional Paper Series 272, European Central Bank.

    More about this item

    Keywords

    Monetary Policy; Inflation; Financial Stability; Balance Sheet;
    All these keywords.

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:safepl:310334. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/csafede.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.