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The awakening of inflation and the return of the Phillips curve in the euro area

Author

Listed:
  • Stefano Neri

    (Bank of Italy)

  • Cristina Conflitti

    (Bank of Italy)

  • Alessandro Lin

    (Bank of Italy)

Abstract

During the 2021-22 high-inflation surge, euro-area firms significantly increased the frequency with which they adjusted prices. This paper documents that such a shift in price-setting behaviour led to a transitory steepening of the Phillips curve, which had remained persistently flat throughout the preceding low-inflation period. In a model with nominal rigidities, a higher frequency of price adjustments steepens the Phillips curve and enhances the transmission of monetary policy, enabling central banks to contain cost-push shocks with a smaller loss in output. We provide robust empirical evidence for the euro area using panel local projections, confirming the link between the frequency of price changes, the slope of the Phillips curve in the euro area, and the increased effectiveness of monetary policy.

Suggested Citation

  • Stefano Neri & Cristina Conflitti & Alessandro Lin, 2026. "The awakening of inflation and the return of the Phillips curve in the euro area," Temi di discussione (Economic working papers) 1525, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1525_26
    as

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    References listed on IDEAS

    as
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    Keywords

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • 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

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