Policy rules and the inflation surge: The case of the ECB

• Prescriptions from simple interest rate rules are compared to ECB decisions. • Rules responding to core or domestic inflation called for early tightening in 2021. • Forecast based rules matching past ECB decisions failed to provide warning. • Policy rules supported the shift to policy easing in 2024. • Simple outcome-based rules deserve more attention in the ECB's strategy. This paper investigates the implications of monetary policy rules during the surge and subsequent decline of inflation in the euro area and compares them to the interest rate decisions of the European Central Bank. It focuses on versions of the Taylor (1993) and Orphanides and Wieland (2013) rules. Rules that respond to recent outcomes of HICP core or domestic inflation data called for raising interest rates in 2021—well ahead of the rate hikes of the ECB. Thus, simple outcome-based rules deserve more attention in the ECB's monetary policy strategy. Interestingly, the rules support the shift to policy easing in 2024.