Articles

Changes to a central bank’s monetary policy strategy, including inflation measurement, can affect expectations and credibility. Using a survey experiment on German households, we study the ECB’s proposal to include owner-occupied housing (OOH) costs in the official inflation metric. Long-term inflation expectations rise when OOH costs are assumed to be fully included. The effect is heterogeneous, with stronger responses among homeowners and those with low trust in the ECB. Expectations remain stable, however, when information on past OOH inflation is provided. The results underscore the importance of careful communication following monetary policy changes. 

We propose a new affine term structure model to decompose inflation-linked swap (ILS) rates into genuine inflation expectations and inflation risk premia. The model accounts for both short-term macroeconomic factors and long-term economic trends, namely trend inflation and the equilibrium real interest rate. We estimate the model for the US and euro area and find that the inflation risk premium significantly drives ILS rates, with macroeconomic shocks playing different roles across maturities and regions. International factors, particularly oil prices, impact market-based inflation expectations during key global events like the COVID-19 pandemic and the Russian invasion of Ukraine.

We use survey evidence on reported spending in hypothetical energy price shock scenarios to study novel features of the price elasticity of energy demand and the marginal propensity to consume (MPC) after paying the energy bill. We document several nonlinearities depending on the sign and magnitude of the energy price shock that are economically relevant, including at the extensive and intensive margins. There is also considerable heterogeneity across households. For price increases, low-income families and those planning major home renovations over the next months report a higher price elasticity of energy demand. Conversely, households with more appetite to consume exhibit a lower elasticity. In contrast, MPCs depend on households’ income, saving buffer, financial uncertainty, appetite to consume, and gender of the household head. Yet household characteristics hardly matter when energy prices decline; we only find smaller MPCs for households with a greater saving buffer and younger families. Finally, we show that targeted price subsidies on energy for Belgian low-income households have been much more effective in supporting non-energy consumption than the general VAT reduction on energy prices. 

New Keynesian DSGE models assume a constant degree of wage indexation to past inflation, neglecting empirical and institutional evidence of a time-varying degree. We build a DSGE model with utility-maximizing workers that can endogenously choose the wage indexation rule. We find that workers index their wage to past inflation when shocks to productivity and the nominal anchor drive output fluctuations. By contrast, they index wages to the inflation target when aggregate demand shocks dominate. We further show that this decentralized equilibrium is not socially optimal, but explains the time-varying degree of wage indexation in US data very well. 

We build a time-varying parameter model that jointly explains the dynamics of euro area inflation and inflation expectations. Our goal is to explain the weak inflation during the post-financial crisis economic recovery of 2013–2019. We find that the inclusion of survey data leads to a more muted decline of trend inflation in recent years and more economic slack. Moreover, the impact of economic slack and import prices on inflation has recently strengthened, and survey respondents updated their beliefs more actively over the financial crisis period. Our model compares well against restricted specifications in terms of forecast performance and marginal likelihood. 

We estimate a New Keynesian wage Phillips curve for a panel of 24 OECD countries and allow the degree of wage indexation to past inflation to vary according to structural characteristics. We find that the degree of wage indexation is significantly lower for countries with an inflation target. However, this effect vanishes when we control for the degree of goods market competition. By contrast, more goods market competition is consistently associated with lower wage indexation. This robust finding puts into question whether embedding a constant degree of wage indexation in standard DSGE models is truly structural. 

As laid down in European treaties, the primary objective of the European Central Bank (ECB) is to maintain price stability in the euro area, together with the national central banks. To meet this objective, the ECB has the freedom to define and implement monetary policy. 

This summer, the ECB completed its latest monetary policy strategy assessment, following similar exercises in 2003 and 2021. The updated strategy can be described as an “evolution, not [a] revolution”. Indeed, the pillars of the strategy remain the same: for instance, the idea that price stability can best be maintained by aiming for a 2% inflation rate over the medium term. That said, recent economic developments necessitated certain adjustments, as highlighted in this article.  

Central banks globally have recently shifted from reporting profits to recording sizeable losses. This article looks at why these losses are occurring and their potential consequences. Can central banks continue to operate efficiently? What do these losses imply for state budgets? 

In 2022, inflation reached 8.4 % in the euro area, a level not seen since the creation of the currency union in 1999. Against this backdrop, one may well wonder whether economic agents still expect an inflation rate close to the 2 % target set by the European Central Bank (ECB). While this question tends to be answered in the affirmative, there are a number of points worthy of attention. 

Data released on Wednesday 19 April confirm that year-on-year inflation in the euro area dropped from 8.5% in February to 6.9% in March. This is the largest fall recorded in the monthly series. Does this mean that inflation is rapidly returning to 2%? The answer to this question is not clear-cut as, unfortunately, changes in year-on-year inflation can sometimes tell us more about what happened a year ago than what’s happening now. 

The government has taken measures to cushion the impact of high energy bills for households, such as a VAT reduction and the extension of social tariffs. Our research shows that the VAT reduction does little to shore up household consumption as most of it is saved. Social tariffs, on the other hand, are more effective in stimulating consumption expenditure. 

On the main findings from the “NBB Listens portal”, an online questionnaire for Belgian citizens that was part of the strategy review undertaken by the ECB and the Eurosystem national central banks. 

How do supply and demand shocks determine potential output?

Why does inflation remain low despite the economic recovery? 

Why interest rates are low (don’t blame the central banks too fast!), and what can be done about it. 

This report offers a strategic view on the economic and inflation environment in the euro area as part of the monetary policy strategy assessment 2025. It reassesses the factors shaping the inflation and economic environment in light of the recent inflation experience, analyses changes in structural factors and examines the implications for the inflation environment the ECB is likely to face. It also draws conclusions regarding the enhancements that need to be made to the existing analytical toolkit and inflation forecasting. 

This paper – which takes into consideration overall experience with the Harmonised Index of Consumer Prices (HICP) as well as the improvements made to this measure of inflation since 2003 – finds that the HICP continues to fulfil the prerequisites for the index underlying the ECB’s definition of price stability. Nonetheless, there is scope for enhancing the HICP, especially by including owner-occupied housing (OOH) using the net acquisitions approach. Filling this long-standing gap is of utmost importance to increase the coverage and cross-country comparability of the HICP. In addition to integrating OOH into the HICP, further improvements would be welcome in harmonisation, especially regarding the treatment of product replacement and quality adjustment. Such measures may also help reduce the measurement bias that still exists in the HICP. Overall, a knowledge gap concerning the exact size of the measurement bias of the HICP remains, which calls for further research. More generally, the paper also finds that auxiliary inflation measures can play an important role in the ECB’s economic and monetary analyses. This applies not only to analytical series including OOH, but also to measures of underlying inflation or a cost of living index.