Modern Monetary Analysis

The role of monetary analysis at the ECB has evolved over the past several decades, expanding from a narrow focus on the quantity of money towards a comprehensive assessment of monetary policy transmission and the credit creation process. This natural evolution was driven by the vulnerabilities of the transmission mechanism unveiled by the global financial crisis and the sovereign debt crisis, along with the need to better understand the new transmission channels set in motion by unconventional monetary policy. The move has also been facilitated by the increased availability of granular data and a parallel expansion in computation capacity. For these reasons, monetary analysis plays a central role at a central bank like the ECB which, as part of a data-dependent approach, has monetary policy transmission as a key element of its reaction function. We illustrate this role by discussing how monetary analysis contributed to the assessment of financing conditions during the pandemic, how it informed the diagnosis of the 2021-2022 surges in inflation, and how it contributed to the calibration of the tightening cycle. Finally, we explore some of the challenges that monetary analysis may face in the years to come.