The Impact of the European Central Bank’s Rate Cut on Inflation

Abstract

The European Central Bank (ECB) has used unconventional monetary policy tools in order to provide more incentives for the Eurozone economy after the 2008 crisis. This study examined especially the impact of the zero and negative interest rate policies on inflation, and to what extent they contributed in achieving the targeted inflation rate depending on the Auto-regressive distributed lag (ARDL) model. The results of the tests showed an inverse relationship between the interest rates and the rate of inflation in the Euro area, with its limited effectiveness in the short term and the lack of its effect in the long term, where reducing the interest rate after the crisis led to an increase in the inflation rate as it reached the target rate, but only for a short period.