Why Post‐ COVID 19 Inflation in Europe Was a Monetary Phenomenon and What Policymakers Should Learn

ABSTRACT

The post‐pandemic inflation surge in the Eurozone demonstrates that large‐scale monetary expansion is not neutral. Drawing on empirical evidence from a Vector autoregression (VAR) analysis, this commentary demonstrates that money supply growth became a dominant driver of inflation as temporary supply disruptions faded, eventually explaining more than one third of medium‐term price dynamics. The findings suggest that once the European Central Bank's balance sheet expands beyond a certain threshold, inflation increasingly takes on a monetary character. For policymakers, the episode highlights the necessity to reevaluate assumptions regarding unconventional monetary policy, incorporate monetary aggregates into forward‐looking decisions, and reconsider the limits of large‐scale interventions to safeguard long‐term price stability and institutional credibility.