Excess savings alter business cycle, dampen monetary policy

The study demonstrates that elevated excess savings markedly weaken the transmission of monetary policy shocks to real economic activity and inflation.

Conversely, in the event of a cost-push disturbance, such as an energy shock, excess savings cushion the impact on output but amplify and prolong the pass-through to inflation.

These findings underscore the critical importance of incorporating household balance-sheet conditions into the assessment and calibration of monetary policy.

The authors confirm that excess savings significantly dampen the monetary impulse to both economic activity and core inflation, a finding corroborated by their empirical strategy relying on local projections and identified monetary policy shocks.

The paper offers additional insights into the euro area's 2022-23 cyclical episode, characterized by a surge in energy prices and an unprecedented pace of policy rate hikes.

In an environment with historically elevated excess savings, this combination resulted in resilient economic growth and stubbornly persistent high inflation.

The findings suggest that excess savings cushioned the impact of the energy shock on economic activity, while simultaneously amplifying its pass-through to core inflation.

At the same time, monetary policy proved less effective, as these savings buffers dampened the transmission of policy tightening to both output and prices, leading to a phase of strong core inflation alongside robust growth.