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Low inflation and monetary policy in the euro area

Author

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  • Neri, Stefano
  • Nobili, Andrea
  • Conti, Antonio M.

Abstract

Inflation in the euro area has been falling since mid-2013, turned negative at the end of 2014 and remained below target thereafter. This paper employs a Bayesian VAR to quantify the contribution of a set of structural shocks, identified by means of sign restrictions, to inflation and economic activity. Shocks to oil supply do not tell the full story about the disinflation that started in 2013, as both aggregate demand and monetary policy shocks also played an important role. The lower bound to policy rates turned the European Central Bank (ECB) conventional monetary policy de facto contractionary. A country analysis confirms that the negative effects of oil supply and monetary policy shocks on inflation was widespread, albeit with different intensity across countries. The ECB unconventional measures since 2014 contributed to raising inflation and economic activity in all the countries. All in all, our analysis confirms the appropriateness of the ECB asset purchase programme. JEL Classification: C32, E31, E32, E52

Suggested Citation

  • Neri, Stefano & Nobili, Andrea & Conti, Antonio M., 2017. "Low inflation and monetary policy in the euro area," Working Paper Series 2005, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20172005
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    11. David Finck & Peter Tillmann, 2019. "The Role of Global and Domestic Shocks for Inflation Dynamics: Evidence from Asia," GRU Working Paper Series GRU_2019_022, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    12. Baumeister, Christiane & Hamilton, James D., 2020. "Drawing conclusions from structural vector autoregressions identified on the basis of sign restrictions," Journal of International Money and Finance, Elsevier, vol. 109(C).
    13. Arnoud Stevens & Joris Wauters, 2021. "Is euro area lowflation here to stay? Insights from a time‐varying parameter model with survey data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 36(5), pages 566-586, August.
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    15. Ortega, Eva & Osbat, Chiara, 2020. "Exchange rate pass-through in the euro area and EU countries," Occasional Paper Series 241, European Central Bank.
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    22. Baumeister, Christiane & Hamilton, James D., 2021. "Reprint: Drawing conclusions from structural vector autoregressions identified on the basis of sign restrictions," Journal of International Money and Finance, Elsevier, vol. 114(C).
    23. Dallari, Pietro & Ribba, Antonio, 2020. "The dynamic effects of monetary policy and government spending shocks on unemployment in the peripheral Euro area countries," Economic Modelling, Elsevier, vol. 85(C), pages 218-232.
    24. Ciccarelli, Matteo & Osbat, Chiara, 2017. "Low inflation in the euro area: Causes and consequences," Occasional Paper Series 181, European Central Bank.
    25. William Gatt & Germano Ruisi, 2022. "The spillover of euro area shocks to the Maltese economy," CBM Working Papers WP/03/2022, Central Bank of Malta.

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    More about this item

    Keywords

    Bayesian methods; inflation; monetary policy; oil supply; VAR models;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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