Monetary policy in the Euro Area, when Phillips curves ... are curves

Summary

The paper develops and estimates a model in which firms and workers adjust prices and wages more often when inflation is high, making inflation react more strongly to shocks. Using euro-area data from 1999–2024, it explains the recent inflation surge and shows that monetary policy is more effective in such periods. It also suggests that earlier tightening could have reduced inflation at limited economic cost.

Highlights

Limits of standard models 
Traditional macroeconomic models rely on a linear relationship, assuming that inflation reacts to shocks in the same way in all situations. 

Explaining recent inflation 
Using euro-area data from 1999–2024, the model shows that endogenous adjustment frequencies help account for the rapid inflation surge observed after 2021. 

Policy effectiveness 
Because inflation becomes more responsive in high-inflation environments, monetary policy is more powerful. Earlier policy tightening could have lowered inflation at relatively low output cost.