Uncertainty and Monetary Policy in the Euro Area

The outbreak of the COVID-19 crisis has triggered a new wave of uncertainty, which may amplify the negative effect of the crisis. Based on several uncertainty measures, we show that inflation in the euro area is negatively affected by higher uncertainty. However, uncertainty does not impair the transmission of monetary policy. Consequently, the ECB should consider uncertainty in its reaction function in order to fulfil its mandate. This document was provided by the Policy Department for Economic, Scientific and Quality of Life Policies at the request of the Committee on Economic and Monetary Affairs (ECON) ahead of the Monetary Dialogue with the ECB President on 19 November 2020.