The European Central Bank has published an Occasional Paper that serves as a reference guide to the effects of “standard” monetary policy rate shocks on euro area output and prices, combining harmonised simulations across European System of Central Banks (ESCB) models with empirical benchmarks and evidence on heterogeneity and non-linearities. The paper is presented as research and does not represent the ECB’s views. Across ESCB models, dynamic stochastic general equilibrium (DSGE) models tend to generate sharper and more front-loaded responses than semi-structural models, which typically imply more gradual and persistent effects. The paper attributes much of the cross-model dispersion to differences in monetary policy rule specifications and Phillips curve slopes, showing that harmonising these assumptions materially narrows the range of inflation and output responses, while reducing real rigidities amplifies output effects. It also examines anticipated rate paths and the “forward guidance puzzle”, documenting that many models include mechanisms to dampen anticipation effects. On the empirical side, a meta-analysis of hundreds of studies finds average (median) responses following an unexpected 25 basis point rate increase peaking at around -0.25 (-0.15) percent for output after two years and -0.18 (-0.11) percent for the price level after four years, with publication-bias-corrected peaks of about -0.14 (-0.08) percent for output and -0.08 (-0.05) percent for the price level. The paper further reports heterogeneous and state-dependent transmission across countries, sectors and demand components, and presents evidence that in high-inflation periods inflation responds more strongly while output effects are dampened, lowering the implied sacrifice ratio, including in analysis of the 2022-23 tightening episode.
European Central Bank 2025-11-06
European Central Bank publishes reference guide benchmarking monetary policy transmission across ESCB models and empirical evidence
The European Central Bank published an Occasional Paper analyzing the effects of standard monetary policy rate shocks on euro area output and prices, using harmonized simulations across European System of Central Banks models. The research highlights differences in model responses due to monetary policy rule specifications and Phillips curve slopes, and examines the "forward guidance puzzle." Findings show varied responses across countries and sectors, with stronger inflation responses and dampened output effects during high-inflation periods.