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Friend, Not Foe - Energy Prices and European Monetary Policy

Discussion Papers 2089, 72 S.

Gökhan Ider, Alexander Kriwoluzky, Frederik Kurcz, Ben Schumann

2024

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Abstract

This paper first shows that, contrary to conventional wisdom, the European Central Bank (ECB) can influence global energy prices. Second, through Lucas critique-robust counterfactual analysis, we uncover that the ECB’s ability to affect fast-moving energy prices plays an important role in the transmission of monetary policy. Third, we empirically document that, to optimally fulfill its primary mandate, the ECB should swiftly tighten policy in response to an increase in energy prices. Crucially, the tightening required depends on the ECB’s ability to influence global energy prices. Finally, we find this policy strategy could have largely prevented the post-pandemic inflation episode.

Frederik Kurcz

Ph.D. Student in the Macroeconomics Department

Ben Schumann

Ph.D. Student in the Macroeconomics Department

Gökhan Ider

Ph.D. Student in the Macroeconomics Department

Alexander Kriwoluzky

Head of Department in the Macroeconomics Department



JEL-Classification: C22;E31;E52;Q43
Keywords: Inflation, energy prices, monetary policy transmission mechanism

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