No. 1202 - Is ECB monetary policy more powerful in expansions?

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by Martina CecioniDecember 2018

The paper studies whether the effectiveness of ECB monetary policy varies with the business cycle in the euro area (that is during recessions and expansions). It estimates the effects of short-term interest rate changes linked to monetary policy announcements on the response of output and inflation between 1999 and 2017.

The estimates show that the effects of monetary policy on prices and wages are stronger during expansions than during recessions, while the effects on output are broadly similar. This result holds when the business cycle is measured by indicators of the degree of resource utilization, as opposed to those based on output growth. The evidence is consistent with the existence of downward nominal wage rigidities.

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