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Policy rules and the inflation surge: The case of the ECB

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  • Tatar, Balint
  • Wieland, Volker

Abstract

This paper investigates the implications of monetary policy rules during the surge and subsequent decline of inflation in the euro area and compares them to the interest rate decisions of the European Central Bank. It focuses on versions of the Taylor (1993) and Orphanides and Wieland (2013) rules. Rules that respond to recent outcomes of HICP core or domestic inflation data called for raising interest rates in 2021—well ahead of the rate hikes of the ECB. Thus, simple outcome-based rules deserve more attention in the ECB's monetary policy strategy. Interestingly, the rules support the shift to policy easing in 2024.

Suggested Citation

  • Tatar, Balint & Wieland, Volker, 2025. "Policy rules and the inflation surge: The case of the ECB," Economics Letters, Elsevier, vol. 252(C).
    • Handle: RePEc:eee:ecolet:v:252:y:2025:i:c:s0165176525001752
    DOI: 10.1016/j.econlet.2025.112338
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    1. Tatar, Balint & Wieland, Volker, 2024. "Taylor Rules and the Inflation Surge: The Case of the Fed," CEPR Discussion Papers 18910, C.E.P.R. Discussion Papers.
    2. Eichenbaum, Martin S. & Rebelo, Sergio & Trabandt, Mathias, 2022. "Epidemics in the New Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 140(C).
    3. Beyer, Robert C.M. & Wieland, Volker, 2019. "Instability, imprecision and inconsistent use of equilibrium real interest rate estimates," Journal of International Money and Finance, Elsevier, vol. 94(C), pages 1-14.
    4. Bletzinger, Tilman & Wieland, Volker, 2017. "Lower for longer: The case of the ECB," Economics Letters, Elsevier, vol. 159(C), pages 123-127.
    5. Athanasios Orphanides & Volker Wieland, 2013. "Complexity and Monetary Policy," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 167-204, January.
    6. Papell David H. & Prodan Ruxandra, 2022. "Policy Rules Consistent with the FOMC’s Longer-Run Goals and Monetary Policy Strategy," The Economists' Voice, De Gruyter, vol. 19(2), pages 147-160, December.
    7. Tatar, Balint, 2023. "Has the reaction function of the European Central Bank changed over time?," IMFS Working Paper Series 183, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    8. Papell, David H. & Prodan-Boul, Ruxandra, 2024. "Policy rules and forward guidance following the Covid-19 recession," Journal of Financial Stability, Elsevier, vol. 74(C).
    9. Hartmann, Philipp & Smets, Frank, 2018. "The first twenty years of the European Central Bank: monetary policy," Working Paper Series 2219, European Central Bank.
    10. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    11. Athanasios Orphanides, 2025. "Enhancing resilience with natural growth targeting," Southern Economic Journal, John Wiley & Sons, vol. 91(4), pages 1420-1439, April.
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    1. Hegemann, Hendrik & Wieland, Volker, 2026. "Scenarios concerning the possible consequences of the Iran war for euro area inflation," IMFS Working Paper Series 233, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    2. Nautz, Dieter, 2025. "Inflation target credibility and the Taylor rule," Discussion Papers 2025/9, Free University Berlin, School of Business & Economics.

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    Keywords

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    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Systems; Standards; Regimes; Government and the Monetary System
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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