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Monetary policy strategies to navigate post-pandemic inflation: an assessment using the ECB’s New Area-Wide Model

Author

Listed:
  • Darracq Pariès, Matthieu
  • Kornprobst, Antoine
  • Priftis, Romanos

Abstract

We assess the effectiveness of ECB monetary policy in the post-pandemic period using a state-of-the-art estimated DSGE model of the euro area. Through counterfactual experiments varying the timing of interest rate hikes, policymaker preferences, and optimality criteria, we compare alternative strategies against actual policy. The ECB’s decision to begin hiking the policy rate in 2022:Q3 effectively balanced inflation and output stabilization, leading to a brief slowdown and inflation converging to target by end-2025. An earlier hike in 2021:Q4 would have reduced peak inflation but caused a prolonged recession, while a delayed hike to 2024:Q1 would have fueled persistent inflation above 4% until 2026. Optimal policy simulations indicate that a more aggressive tightening could have lowered inflation volatility only at the cost of deeper contractions in GDP. Real-time monetary policy counterfactuals confirm that actual policy closely aligned with optimal prescriptions, effectively managing the trade-off between inflation and growth. JEL Classification: C53, E31, E42, E52, E58

Suggested Citation

  • Darracq Pariès, Matthieu & Kornprobst, Antoine & Priftis, Romanos, 2024. "Monetary policy strategies to navigate post-pandemic inflation: an assessment using the ECB’s New Area-Wide Model," Working Paper Series 2935, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20242935
    Note: 604093
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    References listed on IDEAS

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    Cited by:

    1. Shovon Sengupta & Sunny Kumar Singh & Tanujit Chakraborty, 2025. "Macroeconomic Forecasting for the G7 countries under Uncertainty Shocks," Papers 2510.23347, arXiv.org.

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    Keywords

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    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • 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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