an ' Kloos e , Jens
Resea ch Repo
O e coming myopia in he ECB's 2025 mone a y policy
s a egy e iew
Fach ex e
P o ided in Coope a ion wi h:
Deze na Zukun - Ins i u e o Mac o inance, Be lin
Sugges ed Ci a ion: an ' Kloos e , Jens (2025) : O e coming myopia in he ECB's 2025 mone a y
policy s a egy e iew, Fach ex e, Deze na Zukun e.V., Be lin
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1 o 32
#MONETARYPOLICY
#INFLATION
#ECB
O e coming myopia in he ECB’s 2025
mone a y policy s a egy e iew
Jens an ’ Kloos e
[email p o ec ed]
05.05.2025
• The ECB’s s a egy is unde e iew, and igh ly so. Recen in la ion shocks ha e exposed weak-
nesses in he ECB’s cu en app oach. I ocuses oo na owly on medium- e m in la ion expec a-
ions and elies almos exclusi ely on in e es a e adjus men s.
• The s a egy is blind o s uc u al in la ion isks. Supply-side dis up ions, co po a e p icing
powe , and clima e- ela ed shocks we e key d i e s o he 2022-23 in la ion su ge, ye hese isks
lie ou side he ECB’s analy ical amewo k and ime ho izon.
• Ra e hikes alone a e a blun and cos ly ool. The ECB’s eac i e app oach le i wi h ew op ions
beyond aising a es, which did li le o cu b cos -push in la ion a he sou ce and isked unde mi-
ning in es men in long- e m esilience, especially in clean ene gy.
• The ECB’s amewo k can be upda ed. Though mind ul o 1970s-s yle in la ion and inspi ed by
he Bundesbank’s success in igh ing i , he d a e s o he ECB manda e ecognised he
uniqueness o hese ci cums ances and delibe a ely ga e he cen al bank he lexibili y o adap
o new economic challenges.
• The 2025 e iew is a chance o do so. The ECB mus equip i sel o de ec and add ess s uc u al
isks be o e hey ma e ialise - and coo dina e mo e e ec i ely wi h o he EU policy ools o
p ese e p ice s abili y in u bulen imes.
• This epo makes h ee policy ecommenda ions:
1. B oaden he ime ho izon o he ECB’s s a egy o include he long- e m p econdi ions o
p ice s abili y.
2. C ea e a hi d analy ical pilla dedica ed o long- e m isks, including clima e change, ene gy
dependence, demog aphics, ma ke powe and geopoli ical dis up ions.
3. Embed mone a y policy in a wide EU in la ion go e nance amewo k ha suppo s s a-
egic coo dina ion wi h iscal, indus ial and compe i ion policies.
Execu i e Summa y*
Ins i u e o Mac o inance
*I wan o hank Max K ahé o his e y help ul commen s and
de ailed edi s as well as Ludo ic Su o -So el, Au o a Li and he es o he Deze na eam o hei edi o ial suppo .
The Eu opean Cen al Banks (ECB) mone a y policy s a egy speci ies i s p ice s abili y objec i e and i s
app oach o achie ing i . Since s a ing ope a ions in 1998, he ECB has e iewed ha s a egy and
made mino changes in 2003 and 2021. A new e iew is aking place his yea .
The ecen wa e o eco d in la ion has e ealed limi s in he ECB’s cu en s a egy. Policy delibe a ion
in i s Go e ning Council has a na ow ocus on expec ed consume p ice inc eases on a wo- o i e-
yea ime ho izon, which also shapes i s analy ical amewo k. This ocus e lec s a speci ic heo y o
wha is needed o achie e p ice s abili y de i ed om he Bundesbank’s success in aming in la ion
du ing he 1970s. Using a c edible commi men o ac on excessi e demand, he ECB seeks o “ancho ”
in la ion expec a ions and p e en sel - ein o cing p ice-wage dynamics.
In he ace o la ge and pe sis en shocks, howe e , his app oach c ea es a s a k dilemma1. Unlike in
wage ba gaining o iscal policy, whe e s a egic playe s in e nalise he expec ed cen al bank eac ion,
well-ancho ed in la ion expec a ions p o ed ine ec i e in p e en ing in la ion d i en by la ge, he e o-
geneous supply shocks and implici coo dina ion in i m p icing. As a esul , he cu en ECB s a egy
did no p e en he ini ial su ge o in la ion om la e 2021 on.
Once a su ge o his kind is unde way, he cen al bank’s exis ing app oach lea es i s uck be ween a
ock and a ha d place. I can do no hing and wai o he e ec s o he shock o dissipa e; howe e , his
s ill ca ies he isk o de-ancho ing expec a ions. Al e na i ely, i can u n o economy-wide in e es
a e policy o b ing down demand. This is e ec i e a eining in in la ion, bu comes wi h colla e al
damage o in es men , jobs and g ow h.
To escape his dilemma, he op imal policy is nei he o agg essi ely hike a es no o do no hing; i is
o p e-emp i ely a e such ci cums ances in he i s place. This, howe e , equi es a concep ion o
p ice s abili y ha is no limi ed o a medium- e m ime ho izon. P io o 2021, he ECB had a mone a y
pilla dedica ed o h ea s o long- e m p ice s abili y. Gi en i s na ow ocus on mone a y agg ega es,
howe e , his pilla was abandoned, lea ing he ECB wi hou an analy ical lens ha eaches beyond
he medium e m.
Hence his epo ’s main conclusion: The ECB mus o e come he myopia embedded in i s cu en
s a egy and analy ical amewo k. Speci ically, he ECB should:
1. B oaden he ime ho izon o i s mone a y policy s a egy o make he long- e m p econdi-
ions o p ice s abili y pa o he p ice s abili y objec i e
2. In eg a e he analysis o la en and s uc u al isks o p ice s abili y in o a hi d long- e m
pilla o i s analy ic amewo k
3. Posi ion i s mone a y policy s a egy wi hin a wide EU in la ion go e nance amewo k,
emphasizing complemen a i ies and scope o coo dina ion.
Mo eo e , building on ecen schola ship, his epo shows ha he ECB’s legal manda e lea es ample
oom o in oduce he necessa y e o ms. The d a e s o he manda e delibe a ely le he mone a y
policy s a egy open, allowing i o “ espond adequa ely o changing ma ke condi ions”. Doing so now
will equip he ECB o iden i y and po en ially emedy s uc u al isks o p ice s abili y be o e hey ma e-
ialise. When shocks do occu , as hey ine i ably will, bo h hei impac as well as hei p oli e a ion
and ampli ica ion may hen be meaning ully dampened.
Ex ended summa y
2 o 32
Ins i u e o Mac o inance
Ch is ine Laga de, ‘A Robus S a egy o a New E a’ (25 h ECB and I s Wa che s con e ence o ganised by he Ins i u e o Mone a y and
Financial S abili y, Goe he Uni e si y F ank u , 12 Ma ch 2025), h ps://www.ecb.eu opa.eu/p ess/key/da e/2025/h ml/ecb.
sp250312~915537d675.en.h ml.
1
3 o 32
BACKGROUNDPAPER
Table o Con en s
1. In oduc ion .....................................................................................................4
2. The ECB’s manda e and he his o ical o igins o he s a egy e iew ......7
2.1 The 1970s as a model o in la ion igh ing? ................................................................... 7
2.2 The delibe a e openness o he ECB manda e
...........................................................10
3. The ECB’s mone a y policy s a egy and i s medium- e m
o ien a ion ......................................................................................................13
3.1. The ECB’s medium- e m o ien a ion ............................................................................ 13
3.2. The e olu ion o he ECB’s analy ical amewo k ........................................................17
4. Lessons om he 2021-23 in la ion expe ience .........................................19
4.1 Supply cons ain s, cos shocks and i m p icing s a egies in he 2022
in la iona y expe ience ................................................................................................... 19
4.2 Fi e lessons om he 2022 expe ience ..........................................................................22
5. Mo ing beyond myopia in he ECB’s new s a egy ....................................27
5.1 Implica ions o he objec i es and analy ical amewo k ........................................ 27
5.2 Implica ions o oolbox and in la ion go e nance ......................................................29
4 o 32
BACKGROUNDPAPER
In oduc ion1.
The 2022 in la iona y expe ience saw he Eu o-
pean Cen al Bank ail o achie e i s 2% in la i-
on a ge , wi h in la ion in some Membe S a es
eaching double digi s (Figu e 1). This epo in-
es iga es which lessons a e o be d awn om
ha expe ience. I asks: wha changes a e nee-
ded o he ECB’s mone a y policy s a egy in o -
de o i o be adequa ely p epa ed o mo e
ola ile economic ci cums ances, such as hose
o he immedia e a e ma h o he COVID-19
pandemic o a ade wa ?
The ideas conce ning in la ion and p ice s abi-
li y ha in o m he ECB’s mone a y policy
s a egy ha e no changed d ama ically sin-
ce he 1990s. The ECB’s unde s anding o he
ansmission mechanism be ween mone a y
policy and p ice s abili y ocuses on he busi-
ness cycle and economy-wide demand, pa icu-
la ly as d i en by wage g ow h and go e nmen
spending. By implemen ing a c edible commi -
men o ac on excessi e demand, cen al
banks oday seek o “ancho ” in la ion expec a-
ions and p e en sel - ein o cing dynamics o
highe wages and p ices om eme ging.
Figu e 1: Eu o A ea In la ion; Sou ces: Mac obond, Eu os a
5 o 32
BACKGROUNDPAPER
This epo makes he case ha he ECB’s cu -
en mone a y policy s a egy is unduly my-
opic. In coun e ac ing in la ion, he ECB’s 1998,
2003 and 2021 s a egies ha e a medium- e m
ocus, seeking o s abilise in la ion o e a wo-
o i e-yea ime ho izon. As a esul o his me-
dium- e m ocus, he cu en s a egy lacks a
amewo k o conside he long- e m economic
p econdi ions o p ice s abili y. This allows
ce ain isks o p ice s abili y o build up unde
he ada , such as o e ex ended supply chains,
changes in i m p icing s a egies, ene gy de-
pendencies, demog aphic p essu es om an
ageing wo k o ce, o he ising isks o ade
con lic s o geopoli ical con lic . Independen -
ly o whe he he cen al bank is he bes
place o add ess each o hese pa icula
isks, i should main ain a sys ema ic awa-
eness o all o hem.
The s a egy also ocuses he ECB’s a en ion
on demand- ocused measu es. Howe e , no
all isks o p ice s abili y a e bes managed ia
demand-side measu es. This was he case o
he main d i e s o he pos -pandemic in la i-
on, o example, which ell almos en i ely ou -
side he scope o he ECB’s cu en mone a y
policy s a egy. Tha in la ion o igina ed in long
and ul ima ely b i le and o e ex ended supply
chains and om un eliable access o ene gy as
an economic inpu . Eu opean policymake s
had no paid enough a en ion o hese d i e s
in he yea s leading up o 2022. These sec o al
dis up ions in u n coalesced in o economy-wi-
de in la ion h ough an i-compe i i e i m p i-
cing s a egies. Such “selle s’ in la ion” was pos-
sible because a synch onous ise in cos s
allowed compe ing i ms o an icipa e and
coo dina e p ice inc eases. This allowed i ms
o aise p ices wi hou he ea o losing ma ke
sha e.
The ECB’s agg essi e use o demand- ocused
mone a y policy measu es helped b ing
down in la ion, bu also had clea limi a i-
ons. Looking a he 2022 expe ience implies
clea lessons o he e iew o he ECB’s s a -
egy. (1) Economies can become so ulne able
o shocks ha cen al banks may s uggle o
mi iga e hei immedia e e ec s wi h exis ing
ins umen s. E en ex an e well-ancho ed in-
la ion expec a ions p o ed ine ec i e in
add essing in la ion d i en by la ge and he-
e ogeneous supply shocks and ampli ied
by i m p icing s a egies. (2) The ECB's s a-
egy o wai ing o supply shocks o dissipa-
e p o ed inadequa e. While he e we e good
easons o wai ini ially, his app oach le he
ECB wi h ew good op ions as in la ion su ged.
(3) Using con en ional mone a y policy ools in
his con ex also had impo an downsides
om he pe spec i e o long- e m p ice s abili-
y. Cu bing demand ia in e es a e inc eases
can unde mine long- e m p ice s abili y by in-
c easing he cos o c ucial in es men s, pa i-
cula ly in clean ene gy. This myopic app oach
makes he EU economy mo e ulne able o
u u e in la iona y shocks.
This epo ’s main policy conclusion is ha he
ECB should ex end he ime ho izon o e
which i conside s and ac s on isks o p ice
s abili y. Ex ending his ime ho izon will allow
he cen al bank o be e iden i y and deal wi h
exis ing ade-o s be ween he use o demand-
ocused in e es a e hikes and hei nega i e
impac on bo h he supply-side long- e m p e-
condi ions o p ice s abili y and he b oade
economic policies o he EU. These ade-o s
exis i espec i e o whe he in la ion has de-
mand- o supply-side o igins. Inco po a ing
hese p econdi ions in o he s a egy will allow
he ECB’s Go e ning Council o ake hem in o
accoun in i s delibe a ions, e.g. o a oiding
he ade-o by se ing dis inc in e es a es
o dis inc pu poses o which money is used.
Acco dingly, his epo makes h ee p oposals.
The ECB should
●B oaden he ime ho izon o he ECB’s
s a egy o make he long- e m p econ-
di ions o p ice s abili y pa o he p ice
s abili y objec i e
● In eg a e he analysis o long- e m isks
o p ice s abili y in o a hi d long- e m
p ice s abili y pilla o he analy ic
amewo k
●Posi ion he ECB’s s a egy wi hin a
b oade EU in la ion go e nance
amewo k, emphasising complemen-
a i ies and scope o coo dina ion.
6 o 32
BACKGROUNDPAPER
The epo is s uc u ed as ollows: Chap e 2
se s ou he mos ecen legal esea ch on he
in e p e a ion o he ECB manda e, p esen ing
ecen a chi al e idence conce ning he delibe-
a e choice o p o ide he ECB wi h ample
scope o e ising i s mone a y policy s a egy.
Chap e 3 u ns o he s a egy’s medium- e m
objec i e and i s associa ed unde s anding o
he ansmission mechanism. Chap e 4 u ns
o he 2022 pos -pandemic in la ion episode o
d aw ou impo an lessons o he mone a y
policy s a egy e iew. Chap e 5 makes h ee
p oposals o said e iew.
7 o 32
BACKGROUNDPAPER
2. The ECB’s manda e and he his o ical o igins o he s a egy e iew
2
3
4
5
This chap e d aws ex ensi ely on Jens an ’ Kloos e , ‘The Case
o a Eu opean C edi Council: His o ical and Cons i u ional Fi-
ne-Tuning’, Accoun ing, Economics, and Law: A Con i ium 14, no.
4 (1 No embe 2024): 519–32, This chap e d aws ex ensi ely
on Jens an ’ Kloos e , ‘The Case o a Eu opean C edi Council:
His o ical and Cons i u ional Fine-Tuning’, Accoun ing, Econo-
mics, and Law: A Con i ium 14, no. 4 (1 No embe 2024): 519–
32, h ps://doi.o g/10.1515/ael-2022-0074 and a book p ojec
on he his o y o mone a y policy since he 1970s.
Ka hleen McNama a, The Cu ency o Ideas: Mone a y Poli ics in
he Eu opean Union (New Yo k, NY: Co nell Uni e si y P ess,
1998); Ha old James, Making he Eu opean Mone a y Union
(Camb idge, MA: Ha a d Uni e si y P ess, 2013).
Thomas J. Sa gen and Neil Wallace, ‘Some Unpleasan Mone a-
is A i hme ic’, Qua e ly Re iew 5, no. Fall (1981); Leon Lind-
be g and Cha les Maie , The Poli ics o In la ion and Economic
S agna ion (Washing on D.C.: B ookings Ins i u e, 1985), h ps:/
/www.b ookings.edu/book/ he-poli ics-o -in la ion-and-econo-
mic-s agna ion__ ashed/.
Michel C ozie , Samuel P. Hun ing on, and Joji Wa anuki, The
C isis o Democ acy: Repo on he Go e nabili y o Democ acies o
he T ila e al Commission (New Yo k: New Yo k Uni e si y P ess,
1975), 37–38. Lindbe g and Maie , The Poli ics o In la ion and
Economic S agna ion; S e an Eich and Adam Tooze, ‘The G ea
In la ion’, in Vo geschich e de Gegenwa . Dimensionen des S uk-
u b uchs nach dem Boom, ed. Anselm Doe ing-Man eu el, Lu z
Raphael, and Thomas Schlemme (Be lin: Vandenhoeck & Rup-
ech , 2016), 173–96.
This chap e explo es he his o ical con ex o
he d a ing o he ECB's manda e, ocusing on
he e olu ion o cen al banking s a egies sin-
ce he 1970s. I d aws on ecen legal and his o-
ical esea ch in o he ECB manda e.2 The suc-
cess o he Bundesbank in managing in la ion
h ough a e hikes du ing supply shocks, such
as highe oil p ices, signi ican ly in luenced he
ECB's app oach. This success, howe e , e lec-
ed a his o ical con ex in which he ampli ica i-
on o in la ion was d i en by wages and go e -
nmen spending. The d a e s o he ECB
manda e we e awa e o he speci ici yo he ci -
cums ances in which ha app oach had wo -
ked. They delibe a ely ga e he ECB space o
adap i s s a egy in he ace o new ci cum-
s ances. This highligh s he impo an ole o
s a egy e iews in upda ing he ECB's ap-
p oach in esponse o new economic challen-
ges: The e is ample scope wi hin he legal con-
ines o espond wi h a ho oughly e ised
s a egic e o m o oday’s new d i e s o in la-
ion. This open manda e also places a esponsi-
bili y on he ECB o e ise i s mone a y policy
s a egy when acing new d i e s o in la ion.
2.1 The 1970s as a model o in la ion igh-
ing?
F om he 1970s onwa ds, Eu opean cen al
banks con e ged on in e p e ing hei missions
as he pu sui o a p ice s abili y objec i e,
which he cen al bank could achie e by ocu-
sing on wo c ucial d i e s o excessi e de-
mand: wages and go e nmen spending.
In he yea s leading up o he signing o he
1992 Maas ich T ea y, he idea ha mone a y
policy should ake he lead in igh ing in la ion
had become a subjec o ag eemen wi hin he
communi y o cen al banke s.3 In he back-
g ound o his new mone a y policy ocus was
a speci ic c i ical diagnosis o democ a ic go e -
nance: he inabili y o democ a ic capi alism o
esol e con lic s be ween capi al, labou and
go e nmen spending.4 This had led o he in-
la iona y c isis o he 1970s, whe e he wo oil
shocks had ansla ed in o mo e pe sis en in-
la ion ia economy-wide demand om wages
and go e nmen spending. Then, and in con-
as o 2022, wage demands exace ba ed he
in la iona y shock, u ning he ini ial p ice in-
c ease in o a decade o double-digi in la ion.
The 1975 epo o he T ila e al Commission
diagnosed he eco d le els o in la ion as a c i-
sis o democ acy:
In la ion can be conside ed a di ec e-
sul o he ungo e nabili y o Wes e n
democ acies. I is an easy answe o
he ensions o g ow h. The less a soci-
e y is capable o acing hem, he ea-
die i is o accep in la ion as a less
pain ul solu ion. […] Basically, go e n-
men s appea o be unable o induce
g oups which a e in s a egic posi ions
o accep sac i ices.5
8 o 32
BACKGROUNDPAPER
Coun ies wi h independen cen al banks did
be e a na iga ing hese con lic s. As a esul ,
o e he cou se o he 1970s and 1980s, in la i-
on go e nance was placed ou side o democ a-
ic poli ics and en us ed p ima ily o cen al
banks.6
By c edibly commi ing o b ing down econo-
my-wide demand h ough i s in e es a e in-
s umen , he Bundesbank managed o s op
he ongoing wage-p ice spi al (Figu e 2).7 A c u-
cial pa o ha success was c edibili y. In 1973,
he Bundesbank le money ma ke a es climb
up o 20% (wi h spikes o up o 40%).8
Figu e 2: Yea -o e -Yea Change in Real Wages s. Labo P oduc i i y Du ing In la iona y Pe iods; Sou ces:
Des a is, Eu os a , OECD, Ou Wo ld in Da a
6
7
8
John Single on, Cen al Banking in he Twen ie h Cen u y (Cam-
b idge: Camb idge Uni e si y P ess, 2010); G e a R. K ippne ,
Capi alizing on C isis (Ha a d Uni e si y P ess, 2011); Leon
Wansleben, The Rise o Cen al Banks: S a e Powe in Financial
Capi alism (Camb idge, MA: Ha a d Uni e si y P ess, 2023).
While conce ned abou he i s oil shock, he Bundesbank’s
main conce n in 1973 was p e en ing a wage-p ice spi al. As i
explained in i s Annual Repo o ha yea : “The oil-p oducing
coun ies' s i ing o a la ge sha e in he na ional p oduc and
na ional income o he indus ial coun ies need no necessa i-
ly esul in a u he accele a ion o he pace o p ice ises. Whe-
he his occu s depends in e e y coun y e y g ea ly on whe-
he i is made easie o mo e di icul o pass on he highe
p ices o hese (and o he ) majo impo s – in o he wo ds, on
whe he he in ensi ica ion o he in e na ional dis ibu ion
s uggle igge ed o by he oil-p oducing coun ies' p ice
ag eemen is ollowed by an in ensi ica ion o he domes ic
s uggle o he dis ibu ion o he na ional income, which in
eal e ms is ha dly g owing.” (BuBa, ‘Annual Repo 1973’
(F ank u : Bundesbank, 1974), 1).
BuBa, 4.
15 o 32
BACKGROUNDPAPER
Howe e , he signi icance o indi idual ans-
mission channels, he iming o hei impac ,
and e en he di ec ion o hei e ec s can
change. Ou unde s anding o mone a y policy
ansmission is, hence, inhe en ly incomple e.
In he economically a ied eu o a ea, he ou -
comes o shi ing inancial condi ions also
di e signi ican ly among membe s a es and
egions.27 A medium- e m ocus gi es he ECB
ime o dis inguish be ween ypes o economic
shocks, such as demand and supply shocks,
and de ise he mos app op ia e esponse.
Second, and c ucially, i also p o ides lexibili-
y o conside b oade economic impac in
line wi h he ECB’s seconda y manda e. Rai-
sing cen al bank policy a es can be likened o
delibe a ely inducing economy-wide shocks.
Highe a es inc ease he cos o a ious econo-
mic ac i i ies, ul ima ely dampening agg ega e
demand. Fo businesses, inc eased in e es a-
es aise he cos o capi al, making in es -
men s mo e expensi e. Fu he mo e, as mone-
a y policy cu bs economic ac i i y, i di ec ly
impac s p oduc i i y-enhancing i m in es -
men s.28 The longe he pe iod i will ake o e-
pay hose in es men s, he g ea e he damage
om high a es will be; his is c ucial, since i
means ha long- e m in es men s in gene al
and in es men s in clean ene gy in pa icula
a e especially ulne able o high in e es a es.
Acco dingly, as long as in la ion expec a ions
do no de-ancho , he ECB can allow empo a-
y di e gence om he a ge o balance in-
es men , employmen and g ow h wi h
sho - e m p ice s abili y, wi hou comp omi-
sing medium- e m p ice s abili y:
when adjus ing i s mone a y policy ins u-
men s, he Go e ning Council will – p o i-
ded ha wo con igu a ions o he ins u-
men se a e equally conduci e and no
p ejudicial o p ice s abili y – choose he
con igu a ion ha bes suppo s he ge-
ne al economic policies o he Union ela-
ed o g ow h, employmen and social in-
clusion, and ha p o ec s inancial
s abili y and helps o mi iga e he impac
o clima e change, wi h a iew o con ibu-
ing o he objec i es o he Union.
In p ac ice, he ew pe iods ha he ECB did ai-
se a es we e closely ied o p eceding ene gy
and ood p ice shocks (see Figu e 6). In hose
momen s, ea s o a e u n o 1970s in la ion
loomed la ge. As Jean-Claude T iche explained
he ECB’s 2011 hike:
The inc ease in in la ion a es in ea ly
2011 la gely e lec s highe commodi y
p ices. P essu e s emming om he
sha p inc eases in ene gy and ood p ices
is also disce nible in he ea lie s ages o
he p oduc ion p ocess. I is o pa a-
moun impo ance ha he ise in HICP
in la ion does no lead o second- ound
e ec s in p ice and wage-se ing beha-
iou and he eby gi e ise o b oad-ba-
sed in la iona y p essu es o e he medi-
um e m.29
27
28
29
Gianca lo Co se i, Joao B Dua e, and Samuel Mann, ‘One
Money, Many Ma ke s’, Jou nal o he Eu opean Economic As-
socia ion 20, no. 1 (1 Feb ua y 2022): 513–48, h ps://doi.o g/
10.1093/jeea/j ab030.
James K. Galb ai h, ‘Time o Di ch he NAIRU’, The Jou nal o
Economic Pe spec i es 11, no. 1 (1997): 93–108; Osca Jo da,
Sanjay Singh, and Alan Taylo , ‘The Long-Run E ec s o Mone a-
y Policy’, NBER Wo king Pape (Na ional Bu eau o Economic
Resea ch, Inc, Janua y 2020), h ps://econpape s. epec.o g/pa-
pe /nb nbe wo/26666.h m; Luca Fo na o and Ma in Wol , ‘The
Sca s o Supply Shocks: Implica ions o Mone a y Policy’, Jou -
nal o Mone a y Economics, In la ion: D i e s and Dynamics
2022, 140 (1 No embe 2023): S18–36, h ps://doi.o g/10.1016/
j.jmoneco.2023.04.003.
Jean-Claude T iche , In oduc o y s a emen o he p ess con e-
ence o 7 Ap il 2011, F ank u : Eu opean Cen al Bank, 2011,
h ps://www.ecb.eu opa.eu/p ess/p esscon /2011/h ml/
is110407.en.h ml.
16 o 32
BACKGROUNDPAPER
In pu suing p ice s abili y o e he medium
e m, he ECB has consis en ly emphasized he
impo ance o dis inguishing supply and de-
mand shocks. Demand shocks a e e en s such
as highe wages o inc eases in go e nmen
spending whe e demand in he economy goes
up, inc easing economic ac i i y and he eby
aising p essu e on p ices. Facing demand
shocks, he ECB seeks o b ing down he addi i-
onal demand ha comes om c edi c ea ion
and in es men h ough aising in e es a es,
aiming o keep he economy a a pace consis-
en wi h i s long- e m po en ial. This in u n
shapes he expec a ions o economic ac o s,
wage ba gaining be ween employe s and uni-
ons, and go e nmen iscal space. In mac oeco-
nomic heo y, his dynamic is cap u ed by he
idea o o wa d-looking expec a ions.
In p inciple, demand shocks do no c ea e
ade-o s wi h economic ou pu . I he mone-
a y policy eac ion is well calib a ed, i me ely
keeps he economy on i s long- e m g ow h
pa h, wi hou causing colla e al damage.
Supply shocks a e di e en . Al hough p edomi-
nan ly conce ned wi h demand shocks, he
ECB’s s a egies o da e all ecognise ha sup-
ply shocks c ea e a ade-o be ween igh ing
in la ion and o he economic policy objec i es.
E en s such as highe ene gy p ices and na u-
al disas e s can aise p ices while ou pu
slumps. In hese ci cums ances, using mone a-
y policy ins umen s o igh supply shocks is
cos ly, u he supp essing ou pu . Hence, he
ECB seeks o a oid esponding o e ly apid-
ly o supply shocks.
Figu e 6: Eu o A ea In la ion and ECB Ra e Hiking Pe iods; Sou ces: ECB Da awa ehouse, Eu os a , based on Van ’
Kloos e & Webe (2024) ‘The EU’s In la ion Go e nance Gap: The Limi s o Mone a y Policy and he Case o a
New Shock la ion Toolbox’.
17 o 32
BACKGROUNDPAPER
As he ECB summa ised he ou come o he
2003 s a egy e iew:
[M]one a y policy needs o be ailo ed o
he na u e o he shocks hi ing he eco-
nomy, and hei size, sou ce and po en ial
o p opaga ion. On his basis, he key
ECB in e es a es mus e ol e in such a
way ha he pa h o u u e in la ion
emains in line wi h he ECB’s objec i e o
p ice s abili y o e he medium e m.30
Simila ly, he 2021 e iew explained:
As di e en ypes o shock may mo e in-
la ion and eal economic ac i i y in he
same di ec ion (as in he case o demand
shocks) o c ea e a empo a y ade-o
(as in he case o supply shocks), he me-
dium- e m o ien a ion also p o ides he
policy lexibili y o assess he o igin o
shocks and look h ough empo a y
shocks ha may dissipa e o hei own
acco d, hus a oiding unnecessa y ola i-
li y in ac i i y and employmen .31
As we saw in Chap e 2, his in e p e a ion o
he mone a y policy ask e lec s he speci ic
his o ical expe ience o he Bundesbank. Rai-
sing a es helped b ing down in la ion in Ge -
many du ing he i s oil shock, bu did so in a
con ex whe e he ampli ica ion o he ini ial
shock had clea demand-side o igins.
3.2. The e olu ion o he ECB’s analy ical
amewo k
The ECB’s mone a y policy s a egies no only
se ou he high-le el objec i es and ins u-
men s, bu also he analy ic amewo k by
which he Go e ning Council pu sues hose ob-
jec i es in p ac ice. I s ole is unde app ecia ed,
bu i is a he co e o how day o day mone a y
policy se ing unc ions, since i s uc u es deli-
be a ion inside he Go e ning Council and he
ECB wo king g oups ha decide on mone a y
policy.32
The ECB’s cu en analy ical amewo k ocuses
delibe a ion on d i e s o in la ion wi h an eye
owa ds wo ques ions: How will consume
p ices e ol e o e he medium- e m ime ho i-
zon? And a e hose changes d i en by he de-
mand side o he supply side?
The 2021 analy ical amewo k has wo pilla s.
The economic pilla s udies po en ial d i e s o
in la ion, all o which ela e o decision-making
on he sho o medium- e m mone a y policy
s ance:33
● De elopmen s in he sho e m in
economic g ow h, employmen and
in la ion,
● The assessmen o he d i e s o
shocks ha hi he eu o a ea economy,
● The Eu osys em and ECB s a p ojec-
ions o key mac oeconomic a iables
o e a medium- e m ho izon
● A b oad- anging e alua ion o he isks
o economic g ow h and p ice s abili y.
An impo an co olla y o he ocus on espon-
ding “ lexibly” o shocks as d i e s o in la ion is
ha he 2021 s a egy pays li le a en ion o
an icipa ing po en ial u u e d i e s and unde -
s anding he s uc u al causes o , o (po en ial)
isks o, p ice s abili y. While a mone a y pil-
la in he 2003 s a egy ocused on he ana-
lysis o mone a y agg ega es o he pu po-
se o iden i ying long- e m isks o p ice
s abili y, he 2021 s a egy elaced his wi h
a mone a y- inancial pilla ocused on he
ansmission o mone a y policy.
30
31
32
33
ECB, ‘The Ou come o he ECB’s E alua ion o I s Mone a y Poli-
cy S a egy’, 88.
ECB, ‘An O e iew o he ECB’s Mone a y Policy S a egy’.
Alexande Jung, F ancesco Paolo Mongelli, and Philippe Mou-
o , ‘How A e he Eu osys em’s Mone a y Policy Decisions P e-
pa ed? A Roadmap’, JCMS: Jou nal o Common Ma ke S udies 48,
no. 2 (2010): 319–45, h ps://doi.o g/10.1111/j.1468-
5965.2009.02054.x.
ECB, ‘An O e iew o he ECB’s Mone a y Policy S a egy’, 13.
18 o 32
BACKGROUNDPAPER
This pilla o he analy ical amewo k co e s
he ansmission o changes o policy a es ia
c edi , bank lending, isk- aking and asse p i-
cing channels, as well as inancial ulne abili-
ies, imbalances and possible mac op uden ial
esponses.34
Howe e , he amewo k cu en ly omi s consi-
de a ion o po en ial eal economy d i e s o
u u e shocks. Implici ly, hese opics appea o
be assumed o all ou side he opics ele an
o se ing mone a y policy; since hey a e no
some hing he cen al bank a ec s di ec ly
h ough i s mone a y policy s ance, hey a e
no seen as ele an o delibe a ion in he Go-
e ning Council.
This is inadequa e. E en i he ECB canno di-
ec ly a ec he ele an mechanisms – which is
i sel an open ques ion – he e ec i e pu sui o
i s manda e equi es sys ema ic awa eness o
hei unc ioning.
This gap in he ECB’s cu en analy ical ame-
wo k mi o s i s s a egy’s medium- e m ocus.
A i s co e, he a ious ECB s a egies ha e all
ocused on main aining “well ancho ed” in la i-
on expec a ions, ei he by ac ing o ce ully on
demand shocks as soon as hey a e iden i ied
as such, o by seeing h ough supply shocks,
un il and unless hey s a ed o a ec demand-
side ac o s.
In he ace o pe sis en and la ge shocks, his
s a egy p esen s a s a k dilemma.35 The cen-
al bank can do no hing and wai o he
e ec s o a shock o dissipa e, a he isk o s ill
de-ancho ing expec a ions. O i can u n o
economy-wide in e es a e policy o b ing
down demand. This is e ec i e in eining in in-
la ion, bu comes wi h colla e al damage o in-
es men , jobs and g ow h. In addi ion – and
unlike in wage ba gaining o iscal policy, whe e
s a egic playe s in e nalise he expec ed cen-
al bank eac ion – c edibly h ea ening ex pos
a e hikes is ine ec i e a p e en ing an ini ial
su ge i sel i he su ge is no d i en by s a egic
ac o s like go e nmen s o well-coo dina ed
ade unions.
The op imal policy is nei he o agg essi ely
hike a es no o do no hing; i is a e ing such
si ua ions in he i s place. This, howe e , e-
qui es a concep ion o p ice s abili y ha is no
limi ed o a medium- e m ime ho izon.
34
35
ECB, 13.
Laga de, ‘A Robus S a egy o a New E a’.
19 o 32
BACKGROUNDPAPER
4. Lessons om he 2021-23 in la ion expe ience36
36
37
38
39
40
This chap e d aws on Jens an ’ Kloos e and Isabella M.
Webe , ‘The EU’s In la ion Go e nance Gap: The Limi s o Mone-
a y Policy and he Case o a New Shock la ion Toolbox’, S udy
eques ed by he ECON Commi ee (B ussels: Eu opean Pa lia-
men , 2024); o a simila diagnosis, see: Da id Ba mes e al
'The case o adap i e in la ion a ge ing: mone a y policy in a
ho and ola ile wo ld' (London: Cen e o Economic T ansi ion
Expe ise (CETEx), LSE, 2025).
Te ms in oduced by Isabella M. Webe and E an Wasne , ‘Sel-
le s’ In la ion, P o i s and Con lic : Why Can La ge Fi ms Hike
P ices in an Eme gency?’, Re iew o Keynesian Economics 11, no.
2 (14 Ap il 2023): 183–213, h ps://doi.o g/10.4337/ o-
ke.2023.02.05; an ’ Kloos e and Webe , ‘The EU’s In la ion Go-
e nance Gap: The Limi s o Mone a y Policy and he Case o a
New Shock la ion Toolbox’; Isabella M. Webe e al., ‘Ca bon
P ices and In la ion in a Wo ld o Shocks: Sys emically Signi i-
can P ices and Indus ial Policy Ta ge ing in Ge many’ (Gü e s-
loh: Be elsmann S i ung, 2024). On his combina ion o ac-
o s, see also Vi al V. Acha ya e al., ‘How Do Supply Shocks o
In la ion Gene alize? E idence om he Pandemic E a in Eu o-
pe’, NBER Wo king Pape s, NBER Wo king Pape s, Oc obe 2023,
h ps://ideas. epec.o g//p/nb /nbe wo/31790.h ml Isabella M.
Webe , e al., ‘Implici Coo dina ion in Selle s’ In la ion: How
Cos Shocks Facili a e P ice Hikes’, 2024.
BIS, ‘Annual Economic Repo ’ (Basel: Bank o In e na ional
Se lemen s, 2022); Mai Chi Dao e al., ‘Unde s anding he In e -
na ional Rise and Fall o In la ion since 2020’, Jou nal o Mone a-
y Economics, 13 Augus 2024, 103658, h ps://doi.o g/10.1016/
j.jmoneco.2024.103658. Hansen, Toscani, and Zhou, Eu o A ea
In la ion A e he Pandemic and Ene gy Shock; Jakob Fe eile
Adol sen e al., ‘Gas P ice Shocks and Eu o A ea In la ion’, Wo -
king Pape Se ies (Eu opean Cen al Bank, Feb ua y 2024), h -
ps://ideas. epec.o g//p/ecb/ecbwps/20242905.h ml.
Daniel Rees and Phu ichai Rungcha oenki kul, ‘Bo lenecks:
Causes and Mac oeconomic Implica ions’, BIS Bulle ins, BIS
Bulle ins, 11 No embe 2021; Hyun Song Shin, ‘Bo lenecks, La-
bou Ma ke s and In la ion in he Wake o he Pandemic’ (G20
In e na ional Semina “Reco e oge he , eco e s onge ”,
Bali, 2021), h ps://www.bis.o g/speeches/sp211209.pd .
Ma ia G azia A inasi e al., ‘The Semiconduc o Sho age and
I s Implica ion o Eu o A ea T ade, P oduc ion and P ices’, 24
June 2021, h ps://www.ecb.eu opa.eu/pub/economic-bulle in/
ocus/2021/h ml/ecb.ebbox202104_06~780de2a8 b.en.h ml.
The 2021-23 pos -pandemic in la ion expe i-
ence di e ed signi ican ly om he in la iona y
episodes o he 1970s. The la e we e cha ac-
e ised by class con lic, and he ini ial shock
was ampli ied in o gene al in la ion by highe
wages and go e nmen spending. The ecen
in la ion was cha ac e ised by selle s’ in la ion:
he ini ial shock was ampli ied by aci ly coo di-
na ed p ice se ing. This chap e d aws i e les-
sons om ha expe ience. (1) The 2022-23 in-
la ion e ealed ha economies can become so
ulne able o shocks ha cen al banks may
s uggle o mi iga e hei e ec s a impac . (2)
Con en ional mone a y policy, and in pa icula
he ancho ing o expec a ions, p o ed ine ec i-
e in add essing in la ion d i en by bo h la ge
and he e ogeneous supply shocks and by i m
p icing s a egies. (3) The ECB's s a egy o wai-
ing o supply shocks o dissipa e p o ed ina-
dequa e. While he e we e good easons o
wai ini ially, his app oach le he ECB wi h ew
good op ions as in la ion su ged. (4) Using mo-
ne a y policy in his con ex may ha e impo -
an downsides om he pe spec i e o long-
e m p ice s abili y by inc easing he cos o
c ucial in es men s, pa icula ly in clean ene -
gy. This isks making he economy mo e ulne-
able o u u e in la iona y shocks. Finally, (5)
o e -dependence on he dolla comes wi h im-
po an , bu hus a unde app ecia ed isks o
p ice s abili y.
4.1 Supply cons ain s, cos shocks and i m
p icing s a egies in he 2022 in la iona y
expe ience
Jus as he ECB inalised i s 2021 s a egy e-
iew, in la ion s a ed o pick up. In he a e -
ma h o he COVID-19 pandemic, in e locking
supply shocks ampli ied by new i m p icing
s a egies ga e ise o new in la iona y dyna-
mics. The oo s o he 2022 in la ion can be a-
ced back o a combina ion o “shock la ion”, in-
la ion ha o igina es in supply cons ain s and
sec o al dis up ions as well as “selle s in la i-
on”, in la ion caused by i m p icing s a e-
gies.37
Supply cons ain s and cos shocks ma e ialised
as he economy began o eco e om he pan-
demic.38 Du ing he COVID-19 pandemic and
concu en (semi-)lockdowns, consume s had
changed hei spending pa e ns, and hese e-
e sed as he pandemic ebbed.39 Ini ially, he
dis up ions we e concen a ed in speci ic sec-
o s such as shipping, in e media e goods like
au o pa s and semi-conduc o s, and essen ial
commodi ies including chemicals, me als,
wood, and ossil uels. By 2021, 23% o eu o
a ea i ms epo ed limi a ions in p oduc ion
capaci y due o a lack o ma e ials and equip-
men , a s a k de ia ion om his o ical a e ages
o 6% (Figu e 7).40 Na u al gas p ices, exace ba-
20 o 32
BACKGROUNDPAPER
ed by geopoli ical ensions such as he Russian
in asion o Uk aine, eached eco d le els, while
ood p ices soa ed in pa due o clima e change-
induced ag icul u al challenges. The ini ial shocks
esis easy summa y: A d ough in Taiwan, simi-
la ly connec ed o clima e change, signi ican ly
impac ed semiconduc o p oduc ion, which in
u n impac ed a ange o manu ac u ed goods.41
The in la iona y dynamics o 2022 we e exace -
ba ed by i ms' s a egic esponses o hese
supply shocks.42 Fi ms ac oss a ious sec o s
adop ed agg essi e p icing s a egies, aising
uni p ices o p o ec o e en inc ease hei
p o i ma gins.43 This beha iou was no d i en
by adi ional an i-compe i i e conduc such as
o mal ca els o collusi e ag eemen s, bu was
ins ead acili a ed by he economy-wide na u e
o he cos shocks. The synch onous ise in
cos s ac oss indus ies allowed i ms o coo di-
na e p ice inc eases implici ly, as each i m an-
icipa ed simila ac ions by i s compe i o s. This
implici coo dina ion mechanism enabled i ms
o aise p ices wi hou he ea o losing ma ke
sha e, he eby ans o ming sec o al cos
shocks in o a gene alised in la iona y en i on-
men .
Figu e 7: Manu ac u ing P oduc ion Limi s in he Eu o A ea; Sou ce: Eu opean Commission (2025): Business and con
sume su eys
41
42
43
Teng Kai-Yuan, ‘How Taiwan’s Expanding Semiconduc o Indus-
y Deals wi h Wa e Sho ages’, CommonWeal h Magazine,
2022, h ps://english.cw.com. w/a icle/a icle.ac ion?id=3236.
Webe and Wasne , ‘Selle s’ In la ion, P o i s and Con lic ’;
Acha ya e al., ‘How Do Supply Shocks o In la ion Gene alize?’;
Isabella M. Webe , e al., ‘Implici Coo dina ion in Selle s’ In la i-
on: How Cos Shocks Facili a e P ice Hikes’, 2024.
Fab izio Colonna, Robe o To ini, and Eliana Vi iano, ‘The P o-
i Sha e and Fi m Ma kup: How o In e p e Them?’, Bank o
I aly Occasional Pape , 12 May 2023, h ps://pape s.ss n.com/
abs ac =4464310; ECB, ‘How Ha e Uni P o i s Con ibu ed o
he Recen S eng hening o Eu o A ea Domes ic P ice
P essu es?’; Michalis Niki o os, Simon G o he, and Jan Da id
Webe , ‘Ma kups, P o i Sha es, and Cos -Push-P o i -Led In la-
ion’, Indus ial and Co po a e Change 33, no. 2 (1 Ap il 2024):
342–62, h ps://doi.o g/10.1093/icc/d ae003.
21 o 32
BACKGROUNDPAPER
Once unde way, shi ing consume pe cep ions
also ma e ed. While supply shocks we e he
p ima y d i e s, obus consume demand
enabled he pass- h ough o inpu p ice hikes.
Fi ms, con iden in he esilience o demand,
we e emboldened o aise p ices, u he uel-
ling he in la iona y spi al. As i ms aised
p ices in esponse o ini ial cos shocks, he ge-
ne alised in la iona y en i onmen p o ided le-
gi imacy o u he p ice inc eases. Consu-
me s, acing widesp ead p ice hikes, became
mo e accep ing o hese inc eases, educing
he elas ici y o demand and ein o cing i ms'
abili y o aise p ices. This sel - ein o cing cycle
con ibu ed o he pe pe ua ion o in la ion, as
he ini ial cos shocks we e compounded by he
cumula i e e ec s o i ms' p icing s a egies.
In his ega d, he 2022 in la ion should be un-
de s ood as a "selle s' in la ion" as de ined by
Abba Le ne : p ice inc eases o igina ed in i m
p icing s a egies, a he han s a ing wi h
wo ke demands o highe wages.44
Wi hin selle s’ in la ion, i is c ucial o dis in-
guish be ween in la ion caused by ma kup p o-
ec ion and in la ion caused by ma kup inc ea-
se s a egies.45 Ma kup p o ec ion in ol es
i ms aising p ices o main ain hei p o i
ma gins in he ace o ising cos s, while ma k-
up inc ease en ails aising p ices beyond wha
is necessa y o o se cos inc eases, he eby
expanding p o i ma gins. In he la e case,
i ms no only mi iga e he impac o cos
shocks bu also capi alize on he in la iona y
en i onmen o enhance p o i abili y. In media
na a i es, he emphasis has been on he la -
e , whe eas he mos p ominen mac oecono-
mic e ec s come om he o me .
44 45
Abba Le ne , ‘In la iona y Dep ession and he Regula ion o Ad-
minis e ed P ices’, in The Rela ionship o P ices o Economic S abi-
li y and G ow h: Compendium o Pape s Submi ed by Panelis s Ap-
pea ing be o e he Join Economic Commi ee., by Join Economic
Commi ee, (Washing on, D.C., 1958), 257–68; c . Webe and
Wasne , ‘Selle s’ In la ion, P o i s and Con lic ’.
Colonna, To ini, and Vi iano, ‘The P o i Sha e and Fi m Ma k-
up’; Niki o os, G o he, and Webe , ‘Ma kups, P o i Sha es, and
Cos -Push-P o i -Led In la ion’; Webe , e al., ‘Implici Coo dina-
ion in Selle s’ In la ion: How Cos Shocks Facili a e P ice Hikes’.
Figu e 8: The ECB’s s a egy only made new d i e s a conce n o he cen al bank once in la ion was al eady well unde way;
Sou ce: Based on an ’ Kloos e & Webe (2024)
22 o 32
BACKGROUNDPAPER
The ECB's mone a y policy measu es we e
guided by he 2021 s a egy e iew. Howe e ,
i s ocus on demand managemen le unad-
d essed he unde lying supply-side issues and
he ole o i m p icing s a egies in pe pe ua-
ing in la ion. F om la e 2021 onwa ds, as in la-
iona y p essu es moun ed, i became inc ea-
singly clea ha he p ice p essu es we e no
jus d i en by ypical demand-side dynamics. In
line wi h he 2021 s a egy, mos policymake s
ini ially ook he iew ha he in la iona y e ec
o supply shocks could be ansien and did no
equi e a policy esponse.46
As in la ion su ged, howe e , cen al banks, in-
cluding he ECB, esponded wi h unp eceden-
ed mone a y policy measu es. S a ing in July
2022, he ECB aised in e es a es o hei hig-
hes le els in his o y, aiming o educe econo-
my-wide demand and s abilise p ices. The a-
pid pace o hese a e hikes e lec ed he
u gency o add essing in la iona y p essu es,
which had become oo la ge o igno e (see Fi-
gu e 6 abo e).
4.2 Fi e lessons om he 2022 expe ience
The expe ience o he 2022 in la ion con ains
i e key lessons o policymake s ha he ECB
should d aw on in e iewing i s s a egy.
Fi s , i became clea ha la en isks o p ice
s abili y can de elop o e ime, making he
economy so ulne able o shocks ha he
cen al bank is powe less o s op hose
shocks a impac . While he ci cums ances o
he pandemic we e pa icula ly ha sh, he ex-
en o which supply chains had become ulne-
able o shocks had g own conside ably in ea -
lie yea s. Fo example, supply cons ain s had
buil up o e he yea s p io o 2022 as i ms
inc easingly elied on longe alue chains and
jus -in- ime p oduc ion. These de elopmen s
e lec a speci ic ma ke ailu e, whe e up-
s eam sec o s in which i ms unde in es in
capaci y see hei ma ke powe inc ease.47
They can cha ge high p ices i a supply cons-
ain occu s, bu see ew bene i s om o e in-
es men in capaci y, which b ings down sec o-
al p ices. The causes o Eu ope’s ulne abili y
o ene gy p ice shocks a e simila ly s uc u al
and buil up o e ime. The choice o membe
s a es o ely excessi ely on ossil uels, in pa -
icula hose impo ed om Russia, goes back
decades. I had become clea wi h he Russian
in asion o C imea, a he la es ha hese
came wi h se e e geopoli ical isks.
These long- e m isks o p ice s abili y all ou -
side he ECB’s cu en concep ion o i s p ice
s abili y objec i e. Comp ehensi ely add es-
sing hese d i e s o in la ion equi es a
complex combina ion o economic policies, in-
cluding egula o y, indus ial and compe i ion
policy, which all ou side he ECB’s oolbox. Ho-
we e , as he EU’s main policymake o p ice
s abili y, he ECB canno simply igno e hese
ac o s. The ECB’s legal manda e is o main-
ain p ice s abili y, no jus o p e en in la-
ion ha s ems om medium- e m de-
mand-side d i e s o in la ion.
The second lesson o d aw om he expe ience
o 2022 is ha con en ional mone a y policy
is no always an adequa e ool o espond o
an in la iona y en i onmen , e en i i has
an impo an demand componen . Whe e in-
la ion has i s o igins in wage de elopmen s o
go e nmen spending, he cen al bank can
b ing i down o a le el compa ible wi h medi-
um- e m p ice s abili y. Consume s ca e di ec -
ly abou hei pu chasing powe , whe eas go-
e nmen s ca e abou mac oeconomic
ou comes. C edible commi men by he cen al
bank o o se in la iona y demand inc eases
can impac hese economic ac o s’ in la iona y
choices in a ious ways. This ansmission me-
chanism no only has a basis in mac oecono-
mic heo y bu is also well-es ablished in he
poli ical economy and his o ical li e a u e.48
46 47
48
Fabio Pane a, ‘Pa ien Mone a y Policy amid a Rocky Reco e y’
(Sciences Po Pa is, 24 No embe 2021), h ps://www.ecb.eu o-
pa.eu/p ess/key/da e/2021/h ml/ecb.sp211124~a0bb243d e.
en.h ml.
Agos ino Capponi, Chuan Du, and Joseph E. S igli z, ‘A e Supply
Ne wo ks E icien ly Resilien ?’, Finance and Economics Discus-
sion Se ies 2024-031 (Washing on: Boa d o Go e no s o he
Fede al Rese e Sys em, 2024), h ps://pape s.ss n.com/abs-
ac =4754766.
Hall and F anzese, ‘Mixed Signals’; Hancké, Unions, Cen al
Banks, and EMU.
23 o 32
BACKGROUNDPAPER
In con as o wage se ing and go e nmen is-
cal policy, he e may no be a simple connec i-
on be ween in la ion expec a ions and i m p i-
cing s a egies. Academic disag eemen
ocuses on whe he i is nonexis en o jus no
well unde s ood.49 On balance, a mone a y po-
licy announcemen , o e en mo e inde e mina-
e expec a ions abou he economy-wide p ice
le el, may be a bes a seconda y conce n o
an indi idual i m’s decision as o whe he o
change i s ma kup in he ace o a cos shock.
In a compe i i e en i onmen , i s main conce n
should be i s abili y o abso b he inpu cos in-
c ease and whe he i can aise p ices wi hou
losing ma ke sha e. The ew expe imen al s u-
dies on his opic show ha high in la ion ex-
pec a ions may lead i ms o aise p ices, bu
can also ha e he opposi e e ec .50
Fo a ecen empi ical s udy, I ead hund eds o
ea nings call ansc ip s in which US execu i es
discuss cos shocks. The Fede al Rese e is al-
mos ne e men ioned. Whe e execu i es do
see mone a y policy as impac ing hei p icing,
he ocus is backwa d-looking. As one execu i e
explained in 2021:
Thank you, Fede al Rese e and he U.S.
Cong ess, o iscal and mone a y s imu-
lus. We could deba e ansi o y o o he -
wise, bu hose hings a e ansla ing in o,
b oadly, a mo e highly in la iona y en i-
onmen . And ha applies o us, oo, and
ha ob iously is helping om a p icing
powe poin o iew.51
Using in e es a e hikes o esponse o selle s’
in la ion is no only ine ec i e, bu also exace -
ba es i s impac on households. Since mone a-
y policy shapes he inancing condi ions a aila-
ble o households and i ms, i can also indi-
ec ly shape i m p icing decisions. Howe e , o
he ex en ha he e is such a ansmission me-
chanism, i wo ks in pa by u he educing
household pu chasing powe . This is economi-
cally cos ly and exace ba es inequali y.52 F om
he pe spec i e o households, mone a y policy
coun e ac s wha is in p inciple a desi able ca -
ching-up o wages wi h a highe p ice le el. Due
o he impo an ole ha mo gages hemsel-
es ha e in de e mining he pu chasing powe
o consume s in many coun ies, es ic i e
mone a y policy also impac s households’ cos s
o li ing.53
A hi d lesson o d aw om he pos -pandemic
expe ience is ha some cos shocks a e such
ha he cen al bank canno simply wai o
hem o happen and see hem h ough. De-
spi e he no el y o he pos -pandemic in la io-
na y dynamics, he ECB s uck closely o i s exis-
ing mone a y policy s a egy. While cen al
bank esea ch depa men s we e ela i ely
quick o iden i y bo h cos s shocks and i m p i-
cing s a egies as he key d i e s, his did no
ansla e in o a e hinking o in la ion go e -
nance. The Go e ning Council had good eason
o ini ially wai o he in la iona y e ec o sup-
ply shocks o pass. As a cen al bank, he ECB
lacked he ools o add ess supply chain dis up-
ions o educe he p ice o ene gy. Howe e ,
he 2021 s a egy c ea ed a dilemma: ei he ac
wi h an inapp op ia e ins umen o do no hing
(o no enough) and isk losing c edibili y.
Le ing majo in la iona y wa es ipple h ough
he economy had a d ama ic impac on house-
holds’ cos o li ing, wi h eal wages declining a
5.1% yea -on yea a he peak o in la ion in he
hi d qua e o 2022.54 While wages did go up,
49
50
51
52
53
54
No ye well unde s ood: Oli ie Coibion e al., ‘In la ion Expec-
a ions as a Policy Tool?’, Jou nal o In e na ional Economics,
NBER In e na ional Semina on Mac oeconomics 2019, 124 (1
May 2020): 103297, h ps://doi.o g/10.1016/j.jin e-
co.2020.103297. Non-exis en : Rudd, ‘Why Do We Think Tha In-
la ion Expec a ions Ma e o In la ion?’
Oli ie Coibion, Yu iy Go odnichenko, and Sa en Kuma , ‘How
Do Fi ms Fo m Thei Expec a ions? New Su ey E idence’, The
Ame ican Economic Re iew 108, no. 9 (2018): 2671–2713; Oli ie
Coibion, Yu iy Go odnichenko, and Tiziano Ropele, ‘In la ion Ex-
pec a ions and Fi m Decisions: New Causal E idence’, The Qua -
e ly Jou nal o Economics 135, no. 1 (1 Feb ua y 2020): 165–219,
h ps://doi.o g/10.1093/qje/qjz029.
Hil on Wo ldwide Holdings Inc. ea nings call Q3 2021 (Oc 27, 2021).
Luiz Awazu Pe ei a da Sil a e al., Inequali y Hys e esis (Basel:
Bank o In e na ional Se lemen s, 2022), h ps://www.bis.o g/
publ/o hp50.h m.
Ma ijn A. Bolhuis e al., ‘The Cos o Money Is Pa o he Cos o
Li ing: New E idence on he Consume Sen imen Anomaly’,
Wo king Pape , Wo king Pape Se ies (Na ional Bu eau o Eco-
nomic Resea ch, Feb ua y 2024), h ps://doi.o g/10.3386/
w32163.
EC, ‘Labou Ma ke and Wage De elopmen s in Eu ope - Annual
Re iew 2023’ (B ussels: Eu opean Commission, 2024), h ps://
da a.eu opa.eu/doi/10.2767/1277.
24 o 32
BACKGROUNDPAPER
his only compensa ed o a ound 20% o he
cos shock (see also Figu e 3 abo e).55 Ac oss
he EU, he impac on cos o li ing was el
mos s ongly by low and below-median inco-
me households, wi h mo e households li ing in
absolu e po e y; some membe s a es saw in-
c eases by up o 19%.56 The impac o in la ion
also se he s age o global elec o al u moil,
as ang y elec o a es o ed ou incumben go-
e nmen s.57
This b ings us o he penul ima e lesson om
he 2022-23 expe ience: The use o in e es
a es o b ing down economy-wide demand
does no necessa ily p omo e long- e m
p ice s abili y and can e en unde mine i . By
inc easing he cos o long- e m in es men s,
he ECB’s mone a y policy app oach o 2022-23
may ha e made he EU economy mo e ulne a-
ble o u u e in la iona y shocks. Fo i ms, hig-
he in e es a es aise he cos o capi al, he-
eby making in es men s mo e expensi e.
Mo eo e , as mone a y policy d i es down eco-
nomic ac i i y, i s ikes di ec ly a p oduc i i y-
enhancing i m in es men s.58 Addi ionally, he
mo e long- e m hose in es men s, he g ea e
he damage high a es will do. While hese de-
mand- and in es men e ec s a e in pa exac -
ly he way in which mone a y policy achie es i s
p ice s abili y objec i es, he e is no eason o
be indi e en o hei long- e m e ec s on
p ice s abili y.
A pa icula ly ne a ious way in which high a es
unde mine long- e m p ice s abili y is likely by
unde mining clean ene gy in es men s.59 F om
he pe spec i e o a cen al bank wi h a p ice
s abili y manda e, in es men s in deca boni-
sing ene gy sys ems ha e a ious a ac i e
p ope ies.60 They make he economy less de-
penden on impo s. Mac oeconomically, hei
p ices a e also less ola ile, since hey a e less
a ec ed by ade and geopoli ical de elop-
men s: once ins alled, hei a e age annual
cos base is s able. In es men s in ene gy
e iciency measu es ha e simila bene i s in
making he economy less ulne able o ene gy-
ela ed shocks.
Using mone a y policy o pu sue p ice s abi-
li y may ha m p ecisely hose in es men s
mos needed o p o ec he Eu opean eco-
nomy agains u u e shocks. Re lec ing i s
2021 s a egy, he ECB designed i s in la ion
igh ing measu es o ocus on demand-side
o igins o in la iona y p essu es, in pa icula
wage de elopmen . As Isabel Schnabel explai-
ned in Janua y 2023:
Tigh e inancing condi ions will slow
g ow h in agg ega e demand, which is
needed o educe he upwa d p essu e
on p ices ha has esul ed om he long-
las ing damage o he eu o a ea’s p oduc-
ion capaci y in lic ed by he ene gy c i-
sis.61
55
56
57
58
59
60
61
Adol sen e al., ‘Gas P ice Shocks and Eu o A ea In la ion’.
Balin Menyhe , ‘The E ec o Rising Ene gy and Consume
P ices on Household Finances, Po e y and Social Exclusion in
he EU’, Publica ions O ice o he Eu opean Union (Luxem-
bou g, 18 Oc obe 2022), h ps://doi.o g/10.2760/418422.
Ca in an de C uijsen, Jakob de Haan, and Maa en an Rooij,
‘The Impac o High In la ion on T us in Na ional Poli ics and
Cen al Banks’, DNB Wo king Pape (Ams e dam, 3 May 2023),
h ps://pape s.ss n.com/abs ac =4437041.
Galb ai h, ‘Time o Di ch he NAIRU’; Jo da, Singh, and Taylo ,
‘The Long-Run E ec s o Mone a y Policy’; Fo na o and Wol ,
‘The Sca s o Supply Shocks’.
Flo ian Egli, Bja ne S e en, and Tobias S. Schmid , ‘A Dynamic
Analysis o Financing Condi ions o Renewable Ene gy Technolo-
gies’, Na u e Ene gy 3, no. 12 (Decembe 2018): 1084–92, h ps://
doi.o g/10.1038/s41560-018-0277-y; Tobias S. Schmid e al., ‘Ad-
e se E ec s o Rising In e es Ra es on Sus ainable Ene gy T an-
si ions’, Na u e Sus ainabili y 2, no. 9 (Sep embe 2019): 879–85,
h ps://doi.o g/10.1038/s41893-019-0375-2; Seyedeh Fa emeh
Razmi, Ma jan Hei ani Moghadam, and Mehdi Behname, ‘Time-
Va ying E ec s o Mone a y Policy on I anian Renewable Ene gy
Gene a ion’, Renewable Ene gy 177 (1 No embe 2021): 1161–69,
h ps://doi.o g/10.1016/j. enene.2021.06.020; Jens an ’ Kloos-
e , ‘The Eu opean Cen al Bank’s S a egy, En i onmen al Policy
and he New In la ion: A Case o In e es Ra e Di e en ia ion’
(London: G an ham Resea ch Ins i u e on Clima e Change and
he En i onmen , 2022); Shabi Mohsin Hashmi, Qasim Raza
Syed, and Roula Inglesi-Lo z, ‘Mone a y and Ene gy Policy In e lin-
kages: The Case o Renewable Ene gy in he US’, Renewable Ene gy
201 (1 Decembe 2022): 141–47, h ps://doi.o g/10.1016/j. ene-
ne.2022.10.082; Dan Zhang, Yunpeng Wang, and Xinyu Peng,
‘Ca bon Emissions and Clean Ene gy In es men : Global E i-
dence’, Eme ging Ma ke s Finance and T ade 59, no. 2 (26 Janua y
2023): 312–23, h ps://doi.o g/10.1080/1540496X.2022.2099270;
Tane Akan, ‘The Impac o Mone a y Policy on Clima e Change
h ough he Media ion o Sec o al Renewable Ene gy Consump i-
on’, Ene gy Policy 192 (1 Sep embe 2024): 114244, h ps://doi.o -
g/10.1016/j.enpol.2024.114244; Shiu-Sheng Chen and Tzu-Yu Lin,
‘Mone a y Policy and Renewable Ene gy P oduc ion’, Ene gy Eco-
nomics 132 (1 Ap il 2024): 107495, h ps://doi.o g/10.1016/j.ene-
co.2024.107495.
Rizwan Ahmed e al., ‘In la ion, Oil P ices, and Economic Ac i i y in
Recen C isis: E idence om he UK’, Ene gy Economics 126 (1 Oc o-
be 2023): 106918, h ps://doi.o g/10.1016/j.eneco.2023.106918.
Isabel Schnabel, ‘Mone a y Policy Tigh ening and he G een
T ansi ion’ (In e na ional Symposium on Cen al Bank Indepen-
dence, S e iges Riksbank, S ockholm S ockholm, 10 Janua y
2023, 2023), h ps://www.ecb.eu opa.eu/p ess/key/da e/2023/
h ml/ecb.sp230110~21c89be 1b.en.h ml. Mo e ecen ly, F ank
Elde son, ‘Sus ainable Finance: F om “Eu eka!” To Ac ion’ (Su-
s ainable Finance Lab Symposium on Finance in T ansi ion, U -
ech , 2024), h ps://www.ecb.eu opa.eu/p ess/key/da e/2024/
h ml/ecb.sp241004~e2c8a5aae1.en.h ml.
31 o 32
BACKGROUNDPAPER
o he EU-le el policymake s h ough i s mone-
a y policy ins umen s as well as (ii) based he
design o i s decision on policies o he EU’s po-
li ical bodies – p ima ily he Commission, Coun-
cil, Eu opean Council, and/o he Eu opean Pa -
liamen – and he membe s a es.
Coo dina ion is also clea ly pe mi ed by he
ECB’s manda e, pa icula y whe e i se es o
achie e he objec i e o p ice s abili y.83 The Eu-
opean Cou has consis en ly in e p e ed he
ECB’s independence as “ unc ional”, se ing o
p o ec i s abili y o main ain p ice s abili y. In
he 2004 OLAF case, i also clea ly ejec ed he
claim ha he ECB's independence isola es i
comple ely om o he EU ins i u ions and bo-
dies.84 The ac ha he ea ies con ain nume-
ous p o isions ha o malise he exchange o
iews and mu ual consul a ion among a ious
economic policymake s ein o ces his in e -
p e a ion.85
The p ima y challenge in coo dina ed mone a-
y policy gea ed owa ds long- e m p ice s abi-
li y conce ns i s go e nance. Two po en ial ap-
p oaches can ensu e legi imacy in his con ex .
The i s is an app oach o independen policy
coo dina ion, whe e he design o mone a y
policy measu es is managed in e nally by he
cen al bank. This equi es a solid legal basis in
exis ing economic policies ha se ou he long-
e m policy a c o he EU. Fo example, o
clean ene gy in es men s, his could in ol e
ollowing he Taxonomy Regula ion, bu also
mo e ad hoc policies such as RePowe EU o he
Clean Indus ial Ac . He e, i is also c ucial o
moni o whe he a con lic can occu wi h me-
dium- e m p ice s abili y o sec o s al eady a
capaci y. Mul ila e al coo dina ion, in con-
as , in ol es a deg ee o sha ed decision-ma-
king o e he design o mone a y policy measu-
es. Such mul ila e al coo dina ion has clea
ad an ages. The ECB can di ec ly coo dina e
he selec ion o in es men s c ucial o long-
e m p ice s abili y by c ea ing new agencies,
suppo ing exis ing public de elopmen banks,
o h ough c edi councils o o he s anding bo-
dies.
A combina ion o bo h is likely needed. By en-
su ing adequa e suppo o sec o s ha a e
c ucial o long- e m p ice s abili y, he ECB can
o e come myopia and a oid an incohe en po-
licy mix.
83 84
85
an ’ Kloos e and de Boe , ‘Wha o Do wi h he ECB’s Se-
conda y Manda e’; Nik de Boe , Se aina G ünewald, and Jens
Van ’ Kloos e , ‘The Law and Poli ics o Independen Policy
Coo dina ion: Fiscal and Sus ainabili y Conside a ions in he
Eu opean Cen al Bank’s Mone a y Policy’, EBI Wo king Pape
(F ank u : Eu opean Banking Ins i u e, 2024).
Case C-11/00 Commission . ECB, ECLI:EU:C:2003:395, pa a. 134
and 135
e.g. A icle 284(1) and (2) TFEU, P o ocol No. 2, A icle 7 and P o-
ocol No. 14, A icle 1 TFEU.
32 o 32
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