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Monetary policy in the euro area: Active or passive?

Author

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  • Albonico, Alice
  • Ascari, Guido
  • Haque, Qazi

Abstract

We estimate a medium-scale DSGE model for the euro area from the introduction of the euro to mid-2023, testing for indeterminacy in monetary policy. While the indeterminacy model occasionally fits the data better, this result is fragile and sensitive to technical assumptions, particularly the correlation between sunspot and fundamental shocks. Additionally, inflation responses under indeterminacy contradict standard economic theory and empirical evidence. In contrast, the determinacy model aligns with both theory and empirical data, particularly in response to monetary policy shocks. Our findings support the view that monetary policy in the euro area has been sufficiently active to stabilize inflation and prevent self-fulfilling inflationary expectations.

Suggested Citation

  • Albonico, Alice & Ascari, Guido & Haque, Qazi, 2025. "Monetary policy in the euro area: Active or passive?," European Economic Review, Elsevier, vol. 177(C).
    • Handle: RePEc:eee:eecrev:v:177:y:2025:i:c:s001429212500100x
    DOI: 10.1016/j.euroecorev.2025.105050
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    More about this item

    Keywords

    Monetary policy; Indeterminacy; Euro area; Business cycle fluctuations; Inflation;
    All these keywords.

    JEL classification:

    • 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
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General

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