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Forecast errors and the sacrifice ratio of monetary policy in the euro area

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  • Ghirelli, Corinna
  • Pérez, Javier J.
  • Santabárbara, Daniel

Abstract

Forecasters in the euro area significantly overestimated the economic cost of disinflation during the 2022–2024 monetary tightening. Tighter policy was associated to stronger growth and lower inflation than expected, revealing a lower-than-assumed sacrifice ratio. This misjudgment presumably stems from an overemphasis on supply-side inflation, overlooking demand-driven pressures. Our findings challenge prevailing assumptions about monetary multipliers and offer critical insights for future policy design.

Suggested Citation

  • Ghirelli, Corinna & Pérez, Javier J. & Santabárbara, Daniel, 2025. "Forecast errors and the sacrifice ratio of monetary policy in the euro area," Economics Letters, Elsevier, vol. 257(C).
    • Handle: RePEc:eee:ecolet:v:257:y:2025:i:c:s0165176525005154
    DOI: 10.1016/j.econlet.2025.112678
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    References listed on IDEAS

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    1. Christoffer Koch & Diaa Noureldin, 2024. "How we missed the inflation surge: An anatomy of post‐2020 inflation forecast errors," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 43(4), pages 852-870, July.
    2. Olivier J. Blanchard & Daniel Leigh, 2013. "Growth Forecast Errors and Fiscal Multipliers," American Economic Review, American Economic Association, vol. 103(3), pages 117-120, May.
    3. Eleonora Granziera & Pirkka Jalasjoki & Maritta Paloviita, 2025. "The Bias of the ECB Inflation Projections: A State‐Dependent Analysis," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 44(3), pages 922-940, April.
    4. Fatás, Antonio & Summers, Lawrence H., 2018. "The permanent effects of fiscal consolidations," Journal of International Economics, Elsevier, vol. 112(C), pages 238-250.
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    Keywords

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    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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