This paper assesses the transmission of the European Central Bank's (ECB) 2022-23 monetary policy tightening to the euro-area economy and inflation. Quantifying the macroeconomic impact of the tightening cycle is crucial to calibrating the monetary policy stance. To this end, we employ simulations based on an econometric model and a dynamic general equilibrium model with a banking sector.
The large and rapid increase in key interest rates during the 2022-23 period transmitted strongly to the cost of credit. The risk perception of banks was a major driver of policy transmission. The results of the simulation show that monetary policy tightening is likely to have a further negative impact on euro-area real GDP growth and inflation in 2024, with a significant contribution from the banking sector.
