2025 Working papers
Ginters Bušs
Guido Traficante
This paper studies monetary policy in a New Keynesian model with incomplete information regarding the persistence of cost-push shocks. The central bank and the private sector gradually learn about the persistence of the shock as it propagates through the economy. The central bank adopts a look-through policy in response to temporary cost-push shocks; otherwise, it follows a Taylor rule. If agents initially believe the cost-push shock to be temporary, while the true shock is persistent, it takes some time for the central bank, acting initially under an incorrect assumption, to realise its mistake and switch to monetary tightening. As a result, the actual inflation is higher than in a complete information case. Data-dependent discretionary early liftoff strategies can partially mitigate the effects of the initial policy misjudgment. Contrary to the full-information conditions, the findings cast doubt on the effectiveness of look-through policies in environments of incomplete information, irrespective of the actual persistence of the cost-push shock.
Keywords: Monetary policy, imperfect information, cost-push shock, high inflation
JEL codes: D83, E17, E31, E47, E52
Andrejs Zlobins
This paper documents the transmission of conventional monetary policy (MP) shocks over the period of two decades of the euro area’s existence. First, we estimate a linear Bayesian struc- tural vector autoregression (SVAR) and show that it takes approximately 12 – 18 months for the MP shock to fully transmit to both output and headline inflation. However, the transmission lags to the core and services inflation are longer, with full pass-through requiring more than 2 years. This implies that the impact of policy rate hikes implemented in 2022 and 2023 are still unwinding and will further contribute to disinflation of these HICP items. We then extend the SVAR system to allow for time-variation in both the parameter space and shock volatilities to pin down potential changes in the transmission mechanism. Time-varying impulse response functions reveal that the impact on output has been broadly stable over time. However, the reaction of inflation to policy rate hikes has been much stronger and more persistent in the recent tightening cycle, suggesting an exceptionally low sacrifice ratio. Finally, we rationalize those findings in a medium-scale New Keynesian DSGE framework. Model simulations suggest that two factors have contributed to the stabilisation properties of monetary policy: a forceful central bank response to the inflation surge and an increase in the frequency of price changes. While frictions related to wage-setting and real rigidities have likely had only minor implications concerning the effectiveness of monetary policy in the recent tightening cycle.
Keywords: monetary policy, transmission lags, sacrifice ratio, price-setting, euro area
JEL Codes: C54, E31, E50, E52, E58