Why the European Central Bank lacked efficacy to fight against the recent surge in inflation

Séverine  Menguy

doi:10.59400/fefs1626

Séverine Menguy Faculté Sociétés et Humanités, Université Paris Cité, 12 rue de l’école de médecine, 75270 PARIS CEDEX 06, France

Article ID: 1626

36 Views, 26 PDF Downloads

DOI: https://doi.org/10.59400/fefs1626

Keywords: European Central Bank; monetary policy; inflationary factors; economic activity

Abstract

The paper focuses on the determinants of the surge in inflation between 2021 and 2023 and on the efficacy of monetary policy in fighting against these inflationary tensions. The main role of the European Central Bank is to ensure that inflation expectations remain anchored to a clear target. An active monetary policy can also stabilize future expected inflationary tensions or demand shocks. However, a simple theoretical model can explain the incapacity of European monetary policy to fight against the supply-side factors of inflation in the post-COVID period: inflationary tensions inherited from previous periods, imported from foreign countries (energy and food), or due to higher current or anticipated profit margins. In these cases, a huge increase in the nominal interest rate and a very contractionary monetary policy only risk creating a strong recession, without avoiding inflationary tensions.

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