Uncertainty and the transmission of monetary policy in the euro area

This DNB Analysis examines how uncertainty affects the transmission of monetary policy in the euro area. We distinguish between financial, macroeconomic and geopolitical uncertainty and construct euro-area-specific measures for each dimension from a broad set of indicators. The results indicate that monetary policy transmission tends to be weaker when uncertainty is high. While this pattern emerges across all three uncertainty dimensions, the attenuation of monetary policy transmission appears particularly pronounced during periods of elevated financial and geopolitical uncertainty. This suggests that central banks should consider both the level and the type of uncertainty when assessing the monetary policy stance and may need to act more forcefully to achieve comparable effects on inflation in highly uncertain times.