Rate increases slow output by 0.39 points only during calm periods
A 25-basis-point monetary policy tightening reduces euro area output growth by 0.39 percentage points during calm periods but has statistically insignificant effects during high uncertainty, according to research by De Nederlandsche Bank covering data from 2003 to 2025.
Calm regimes amplify policy impact
A standard 25-basis-point monetary tightening produces a peak decline of 0.39 percentage points in euro area output growth and a 0.07 percentage-point fall in inflation under low uncertainty.
Over the full horizon, cumulated output contracts by 1.27 percentage points and inflation declines by 0.27 percentage points.
In contrast, when uncertainty is elevated, the responses of both output and inflation are considerably weaker and statistically insignificant.
The attenuation of transmission is most pronounced during geopolitical and financial stress.
Low geopolitical uncertainty sees output growth drop by up to 0.67 percentage points after a rate increase, while low financial uncertainty generates a 0.50 percentage-point peak decline.
Purging global noise from euro data
The authors, Maria Sole Pagliari and Minke van der Heijden, estimated state-dependent local projections using monthly euro area data from January 2003 to November 2025.
The empirical framework isolates euro-area-specific financial, macroeconomic, and geopolitical uncertainty factors by purging global co-movements from indicators such as the CISS, VSTOXX, and forecast dispersion.
Monetary shocks are identified using high-frequency yield surprises scaled to 25 basis points.
Linear policy models fail in turbulence
The analysis demonstrates that central banks cannot rely on linear transmission during turbulent market conditions.
Muted policy traction may force rate-setters to deliver larger moves to anchor inflation expectations.
Yet forceful tightening under high uncertainty risks overshooting once economic stability returns.