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Highly Dispersed Inflation Rates Challenge the ECB's Monetary Policy Strategy
In contrast to other large economies, the euro area shows a high regional dispersion of inflation rates since the mid of 2021. The energy price shock uncovered structural differences among member countries of the currency union. Additionally, European governments responded with administrative or fiscal interventions of varying degree. A consistent pattern emerges with low inflation countries implementing policies dampening the HICP more intensively, while high inflation countries behaved more restrained. Potential monetary policy responses to an energy price shock include a differential weighting of country specific inflation rates in the loss function or, alternatively, macroprudential measures. If a wage-price spiral is set in motion, the ECB would have to swiftly raise the key interest rates to confirm its commitment to the inflation target.
JEL-Codes:E31, E58, E63
Keywords:Brexit, City of London, financial services, financial centres
Research group:Macroeconomics and Public Finance