Abstract
We assess the effectiveness of ECB monetary policy in the post-pandemic period using a state-of-the-art estimated DSGE model of the euro area. Through counterfactual experiments varying the timing of interest rate hikes, policymaker prefer ences, and optimality criteria, we compare alternative strate gies against actual policy. The ECB’s decision to begin hiking the policy rate in 2022:Q3 effectively balanced inflation and output stabilization, leading to a brief slowdown and inflation converging to target by end-2025. An earlier hike in 2021:Q4 would have reduced peak inflation but caused a prolonged recession, while a delayed hike to 2024:Q1 would have fueled persistent inflation above 4 percent until 2026. Optimal policy simulations indicate that a more aggressive tightening could have lowered inflation volatility only at the cost of deeper con tractions in GDP. Real-time monetary policy counterfactuals confirm that actual policy closely aligned with optimal pre scriptions, effectively managing the trade-off between inflation and growth.
Authors
- Matthieu Darracq Pariès
- Antoine Kornprobst
- Romanos Priftis
JEL codes
- C53
- E31
- E42
- E52
- E58