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Inflation and growth forecast errors and the sacrifice ratio of monetary policy in the euro area

Author

Listed:
  • Corinna Ghirelli

    (BANCO DE ESPAÑA)

  • Javier J. Pérez

    (BANCO DE ESPAÑA)

  • Daniel Santabárbara

    (BANCO DE ESPAÑA)

Abstract

This paper investigates the relationship between inflation and GDP growth forecast errors and the expected monetary policy stance in the euro area during the monetary policy cycle of 2022-2024, when inflation was well above the ECB’s target. Under rational expectations, forecasts of monetary contractions should be unrelated to subsequent inflation and growth forecast errors. On the contrary, we find that expected monetary policy tightening has been associated with higher than projected GDP growth, suggesting a lower monetary policy effect than that factored in by (ECB/Eurosystem and IMF) forecasters. In other words, forecasters overestimated the monetary multiplier. At the same time, monetary policy tightening has been associated with lower than expected inflation, suggesting an underestimation of the monetary multiplier on inflation. Putting these two stylized facts together implies that forecasters overestimated the sacrifice ratio during the last monetary policy tightening cycle. Our findings suggest that forecasters may have inaccurately perceived the recent inflationary crisis in the euro area as predominantly supply-driven, underestimating its demand-driven component. This led to the belief that monetary policy in the euro area would be exceedingly costly in terms of output.

Suggested Citation

  • Corinna Ghirelli & Javier J. Pérez & Daniel Santabárbara, 2025. "Inflation and growth forecast errors and the sacrifice ratio of monetary policy in the euro area," Working Papers 2516, Banco de España.
    • Handle: RePEc:bde:wpaper:2516
    DOI: https://doi.org/10.53479/39441
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    References listed on IDEAS

    as
    1. Jonas Dovern & Ulrich Fritsche & Jiri Slacalek, 2012. "Disagreement Among Forecasters in G7 Countries," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 1081-1096, November.
    2. Olivier J Blanchard & Daniel Leigh, 2014. "Learning about Fiscal Multipliers from Growth Forecast Errors," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 62(2), pages 179-212, June.
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    Cited by:

    1. Kristin Forbes & Jongrim Ha & M. Ayhan Kose, 2025. "Tradeoffs over Rate Cycles: Activity, Inflation, and the Price Level," NBER Chapters, in: NBER Macroeconomics Annual 2025, volume 40, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

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    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • 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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