Publications - Working Papers IER SAS

In this paper, we quantitatively assess the ’behind-the-curve’ behaviour of central banks in response to the recent surge in post-pandemic inflation in Europe. This concept describes a situation in which a central bank reacts with a time lag to a changing economic environment, resulting in situation when a policy rate that deviates from a Taylor rule-like rate. The ’behind-the-curve’ measure calculates the duration of divergence between the two policy rates in terms of elapsed time, i.e. the number of months. The Taylor-rule-like policy rates for nine European inflation-targeting countries are computed using a long-T-small-N panel model with a rich set of time- and country-interacted fixed effects. Additionally, we identify the determinants of ’behind-the-curve’ behaviour and assess its impact on post-episode inflation rates. Our preliminary findings suggest that higher inflation rates are observable within a short-term horizon of two to three months during the post-BTC tightening period, but disappear afterwards.