Insights into the Price Puzzle: The Impact of Main Refinancing Operations (MRO) Rate and Unconventional Monetary Policy.

Abstract

This paper utilizes a Structural Vector Autoregressive model (SVAR) to explore the intricacies of monetary policy and inflation dynamics in the Eurozone. When examining conventional monetary policy, impulse reactions reveal a positive price response to positive interest rate innovations, contrary to theory, thus indicating a "price puzzle." However, the inclusion of commodity prices and exchange rates in the model appears to effectively mitigate this puzzle. Given the European Central Bank's (ECB) extensive use of unconventional monetary policy tools, investigating the impact of external shocks on the ECB's total assets is of particular significance. Parallel insights emerge when transitioning to a model where the external shock corresponds to the ECB's unconventional monetary policy.

Keywords

• European Monetary Union
• monetary policy
• inflation
• SVAR