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Dancing on the edge of stagflation

Author

Listed:
  • Paolo Canofari
  • Giovanni Di Bartolomeo
  • Marcello Messori

Abstract

The European Central Bank (ECB) is facing a dangerous trade-off between the control of supply-led inflation and the need to avoid a further recession in the euro area. The paper argues that an effective ECB monetary strategy to handle this trade-off would have been to anticipate the increase in the policy interest rates and postpone the end of the asset net purchase programs. Unfortunately, the ECB did not follow this sequence, which is why its current monetary policy, bound in a tricky balance, risks favoring euro-area stagflation and financial market fragmentation. Moreover, the new anti-fragmentation instrument (TPI) introduced by the ECB appears ineffective and subject to excessive discretion. Therefore, the ECB should instead activate a compelling combination of its rules-based monetary policy with EU centralized and national fiscal policies.

Suggested Citation

  • Paolo Canofari & Giovanni Di Bartolomeo & Marcello Messori, 2022. "Dancing on the edge of stagflation," Working Papers in Public Economics 231, University of Rome La Sapienza, Department of Economics and Law.
    • Handle: RePEc:sap:wpaper:wp231
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    Keywords

    Stagflation; monetary policy; ECB;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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