LIST OF ABBREVIATIONS  7

LIST OF FIGURES  8

LIST OF TABLES  8

EXECUTIVE SUMMARY  9

1. INTRODUCTION  10

2. TWO INFLATIONARY EPISODES: 2022-2023 AND 2026  12

2.1. Anatomy of an energy shock  12

2.2. Inflation dynamics across euro area member states  16

3. SUPPLY VS. DEMAND DRIVEN INFLATION AND THE OPTIMAL RESPONSE OF MONETARY POLICY  20

3.1. Central banks should not always tighten monetary policy after energy shocks  20

3.2. Supply and demand are intertwined  21

3.3. The example of green investments  23

4. LESSONS FROM THE ECB’S RESPONSE TO THE 2022–2023 ENERGY CRISIS AND IMPLICATIONS FOR FUTURE SUPPLY SHOCKS  24

4.1. ECB Reaction to the previous Inflation Surge: Timing and Magnitude  24

4.2. ECB Mandate: Scope and Limitations  27

5. CONCLUSION  30

REFERENCES  31