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Statement on economic growth (Q3 2025) 

On Monday, 1 December, from 11:00 to 12:00, a research seminar will take place at Eesti Pank, where Andrejs Zlobins, Senior Economist at the Bank of Latvia, will present his research paper “Monetary Policy Transmission in the Euro Area: Is this Time Different? A Tale of Inflation, Expectations and Shocks”.

In his work, Andrejs Zlobins analyses how monetary policy transmission to the economy functioned in the euro area during the period of monetary policy tightening, i.e., interest rate hikes, and which factors have contributed to the soft landing of the economy. The study shows that vigorous monetary policy aimed at countering inflationary pressures helped anchor inflation expectations and align differing views on the future dynamics of inflation. The tightening of financing conditions also contributed to the slowdown in inflation. In addition, Zlobins shows that in the post-pandemic period the European Central Bank reacted more strongly to rising energy prices because these increasingly affected inflation expectations.

Andrejs Zlobins’ main research areas are monetary policy transmission mechanisms and macroeconomic modelling. More information about his research and publications is available at <a href="https://www.macroeconomics.lv/researchers/andrejs-zlobins">https://www.macroeconomics.lv/researchers/andrejs-zlobins</a>

The seminar can also be followed via <a href="https://teams.microsoft.com/l/meetup-join/19%3ameeting_NTVmZWQwOWQtYWRhMS00ZmU1LWE0NmItZGM1NTU3NWE5NDBm%40thread.v2/0?context=%7b%22Tid%22%3a%227612cc54-c497-4c75-8ece-146688e01419%22%2c%22Oid%22%3a%2234f7d67c-4c01-4f87-999e-db6bff5cc8d7%22%7d">Microsoft Teamsis</a>.

<div class="emphasize">Monetary Policy Transmission in the Euro Area: Is this Time Different? Chapter II: A Tale of Inflation, Expectations and Shocks

As advanced economies experienced a once-in-a-generation surge in inflation, central banks embarked on rapid tightening cycles, with the ECB cumulatively raising interest rates by 450 basis points. Despite aggressive monetary tightening, economies appear to be on track for a soft landing, with recent literature documenting exceptionally low sacrifice ratios during the post-pandemic tightening cycles. This paper explores the strength of several monetary policy transmission channels to identify the factors that contributed to a favourable trade-off for monetary policy stabilization. To that end, we estimate a structural vector autoregression with time-varying parameters and stochastic volatility using euro area data from 2002 to 2023. Empirical evidence suggests that the forceful monetary policy response to the inflation surge helped contain the de-anchoring of inflation expectations and reduced the disagreement about the future path of inflation. The sharp tightening of financial conditions also contributed to disinflation, but this was driven by more responsive systematic component of monetary policy to supply shocks rather than changes in the propagation mechanism of discretionary monetary policy shock via the banking sector. Moreover, we show that the ECB became more reactive to cost-push shocks in the post-pandemic period, particularly those stemming from energy prices, as these infiltrated inflation expectations and were further amplified by the countercyclical response of profits. A medium-scale New Keynesian setup augmented with bounded rationality in the expectation formation process and endogenous uncertainty supports these empirical observations. Model simulations suggest that such disturbances to inflation expectations require an aggressive monetary policy response — especially if the central bank initially attempts to look through the shock — in order to limit the deviation of inflation from target.
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RESEARCH SEMINAR. Monetary Policy Transmission in the Euro Area: Is this Time Different? A Tale of Inflation, Expectations and Shocks

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detsember 2025