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Inflation Target Shocks and Monetary Policy Inertia in the Euro Area

  • Patrick Fève
  • Julien Matheron
  • Jean-Guillaume Sahuc

The euro area as a whole has experienced a marked downward trend in inflation over the past decades and, concomitantly, a protracted period of depressed activity. Can permanent and gradual shifts in monetary policy be held responsible for these dynamics? To answer this question, we embed serially correlated changes in the inflation target into a DSGE model with real and nominal frictions. The formal Bayesian estimation of the model suggests that gradual changes in the inflation target have played a major role in the euro area business cycle. Counter-factual exercises show that, had monetary policy implemented its new inflation objective at a faster rate, the euro zone would have experienced more sustained growth than it actually did. Copyright � The Author(s). Journal compilation � Royal Economic Society 2009.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 120 (2010)
Issue (Month): 547 (09)
Pages: 1100-1124

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Handle: RePEc:ecj:econjl:v:120:y:2010:i:547:p:1100-1124
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