Monetary policy in a low inflation regime

: evidence from the Euro Area

Abstract

This thesis examines the transmission of monetary policy in a low inflation environment, discussing the policy implications of sluggish and persistent inflation in a European Union framework and addressing possible causes behind cross-sectional heterogeneities at the sector-specificlevel. Exploring a disaggregated panel dataset of monthly HICPs for Germany, this thesis showsthat the principal component of sectoral prices, a proxy for “pure-inflation”, successfully tracksthe transmission of macroeconomic shocks in the economy. The proportion of sectors affectedthough is limited as the law of motion of inflation in a low regime is denoted by a self-stabilisingpattern, which limits monetary authorities’ margins of action. However, when positive and negative shocks are treated asymmetrically, the difference in impact is striking: the proportion ofsectors affected by pure positive (contractionary) shocks are more than three times the proportion affected by negative (expansionary) shocks, stressing the key role of the existing inflation environment. Overall, the broad sectoral categories that respond meaningfully to monetary intervention are those endowed with cyclical properties and, by definition, more sensitive topolicy-induced fluctuations of aggregate demand.

Date of Award	17 May 2023
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Joana Santos Silva (Supervisor)