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Monetary policy and the recent inflation surge
Monetary policy in the euro area responded to the recent inflation surge in a passive, gradual and slow manner, possibly even contributing to the inflationary process by employing an expansionary stance. We discuss three justifications for the moderate response of monetary policy: (1) The weak theoretical support of active feedback rules in the conduct of monetary policy; (2) an optimal inflationary bias when there are large relative price movements and prices are downward rigid; (3) optimal debt depletion in response to a large negative fiscal shock, such as the one observed after the outbreak of the COVID-19 pandemic.