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How Major Central Banks Reacted to the Inflationary Wave of the Early 2020s - The Case of the ECB

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  • Ruben Durko

    (John von Neumann University)

Abstract

From 2021 onwards, inflationary pressures around the world have forced most central banks to raise interest rates from a level that had long been around 0 per cent. However, some central banks, including the European Central Bank (ECB), have often been the subject of criticism for not paying enough attention to the emerging inflationary spiral. The author examines whether there is evidence that the ECB started to tighten monetary conditions later than it had done in the past. The interest rate rule widely applied by the academic community and the results of the pseudo-forecast based on this rule show that the ECB moved later than its historical behaviour would suggest, i.e. it started tightening three quarters later than indicated in the model; nevertheless, by the end of 2022, the actual and the theoretical rates were in line thanks to the intensive rate hikes.

Suggested Citation

  • Ruben Durko, 2023. "How Major Central Banks Reacted to the Inflationary Wave of the Early 2020s - The Case of the ECB," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 22(4), pages 31-57.
    • Handle: RePEc:mnb:finrev:v:22:y:2023:i:4:p:31-57
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    References listed on IDEAS

    as
    1. Harding, Martín & Lindé, Jesper & Trabandt, Mathias, 2023. "Understanding post-COVID inflation dynamics," Journal of Monetary Economics, Elsevier, vol. 140(S), pages 101-118.
    2. Karel Havik & Kieran Mc Morrow & Fabrice Orlandi & Christophe Planas & Rafal Raciborski & Werner Roeger & Alessandro Rossi & Anna Thum-Thysen & Valerie Vandermeulen, 2014. "The Production Function Methodology for Calculating Potential Growth Rates & Output Gaps," European Economy - Economic Papers 2008 - 2015 535, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    3. Wendy Edelberg & David A. Marshall, 1996. "Monetary policy shocks and long-term interest rates," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 20(Mar), pages 2-17.
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    More about this item

    Keywords

    inflation; monetary policy; euro area; interest rate rule;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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