No. 1525 - The awakening of inflation and the return of the Phillips curve in the euro area
The paper provides new empirical evidence on the link between the frequency of consumer price adjustments, the slope of the Phillips curve (which captures the relationship between the inflation rate and the unemployment rate), and the effectiveness of monetary policy in the euro area. The theoretical framework is a model in which the frequency of price adjustments depends on the occurrence of cost shocks faced by firms. Greater price flexibility allows monetary policy to stabilize inflation with limited costs for the real economy.
In the years 2021-22, inflation rose to exceptionally high levels, also reflecting the more frequent revisions of goods and services prices. This made inflation more sensitive to cyclical conditions, thereby steepening the Phillips curve. In this context, monetary policy was able to counter inflationary shocks more effectively than in the past without imposing excessive costs on the economy.
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17 March 2026
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