Monetary policy in the Euro Area, when Phillips curves ... are curves

Working paper 861
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Published: 04 May 2026

By: Guido Ascari Alexandre Carrier Emanuele Gasteiger Alex Grimaud Gauthier Vermandel

We study monetary policy in an environment where price and wage Phillips curves exhibit true curvature. To this end, we propose a New Keynesian model with endoge-nous adjustment of price and wage setting frequencies, moving beyond the quasi-linear structure of standard nonlinear NK Phillips curves. Using euro area data from 1999Q1 to 2024Q4, we estimate and simulate the non-linear model, analyzing the recent inflation surge and the implications of state-dependent prices and wages for monetary policy. Unlike conventional models, our framework does not attribute inflation dynamics pri-marily to exogenous supply shocks. Instead, the impact of shocks is asymmetric and de-pends on their timing, size, and the business cycle. Consequently, the inflation–output stabilization trade-off is state-dependent: monetary policy is more effective in curbing inflation, and supply shocks have larger effects during periods of high inflation.

Keywords: New Keynesian Phillips Curve; non-linearity; inflation; monetary policy
JEL codes C51; E31; E47; E52

Working paper no. 861

861 - Monetary policy in the Euro Area, when Phillips curves ... are curves

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Research highlights:

  • This paper develops a New Keynesian model with endogenous, state-dependent price and wage adjustment, generating genuinely nonlinear Phillips curves.
  • The resulting nonlinear model has been estimated using euro area macrodata (1999–2024), yet matching well recent micro evidence on adjustment frequencies.
  • The empirical results show that inflation dynamics are sign- and size-dependent, with shock effects varying across business-cycle and inflation states.
  • Phillips curves steepen in high inflation, making disinflation more effective and the inflation–output trade-off state-dependent.
  • The policy implication is that during rising inflation, earlier and stronger monetary tightening can curb inflation with relatively low output costs.

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