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Monetary Policy in the Euro Area, when Phillips Curves ... are Curves

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  • Ascari, Guido
  • Carrier, Alexandre
  • Gasteiger, Emanuel
  • Grimaud, Alex
  • Vermandel, Gauthier

Abstract

We study monetary policy where the price and wage Phillips curves exhibit true curvature. To this end, we propose a New Keynesian (NK) model featuring endogenous adjustment of price and wage setting frequencies, moving beyond the quasi-linear structure of the standard nonlinear NK Phillips curves (NKPC). Using euro area data spanning 1999Q1 to 2024Q4, we estimate and simulate the non-linear model. We then study the recent inflation surge and the implications of state-dependent prices and wages for monetary policy in the estimated non-linear model. Unlike conventional models, our framework does not primarily explain inflation dynamics by exogenous supply shocks. Instead, the impact of shocks on inflation depends on their timing, size, and the business cycle. Consequently, the inflation-output stabilization trade-off faced by monetary policy is state-dependent. For example, monetary policy is more effective in curbing inflation, and supply shocks have larger effects during periods of high inflation.

Suggested Citation

  • Ascari, Guido & Carrier, Alexandre & Gasteiger, Emanuel & Grimaud, Alex & Vermandel, Gauthier, 2025. "Monetary Policy in the Euro Area, when Phillips Curves ... are Curves," CEPR Discussion Papers 20489, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:20489
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    Cited by:

    1. Ambrocio, Gene, 2026. "Demographic aging and the New Keynesian Phillips Curve," European Economic Review, Elsevier, vol. 184(C).
    2. Gebauer, Stefan & Nakov, Anton & Nuño, Galo & Osbat, Chiara & Paz-Pardo, Gonzalo & Paulus, Alari & Quintana, Javier & Valderrama, Maria Teresa & Palazzolo, Alberto, 2026. "The propagation of shocks across the production network and implications for monetary policy," Occasional Paper Series 392, European Central Bank.
    3. Cristina Conflitti & Daniel Enderle & Ludmila Fadejeva & Erwan Gautier & Alex Grimaud & Eduardo Gutiérrez & Valentin Jouvanceau & Jan-Oliver Menz & Alari Paulus & Pavlos Petroulas & Pau Roldan-Blanco , 2026. "Consumer Price Stickiness in the Euro Area During an Inflation Surge (Erwan Gautier, Cristina Conflitti, Daniel Enderle, Ludmila Fadejeva, Alex Grimaud, Eduardo Gutiérrez, Valentin Jouvanceau, Jan-Oliver Menz, Alari Paulus, Pavlos Petroulas, Pau Rold," Working Papers 273, Oesterreichische Nationalbank (Austrian Central Bank).

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    Keywords

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    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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