At the crossroads of inflation : analyzing Central Bank responses in noneconomic crises

Bajra, Ujkan Q. (author), Gjeçi, Ardit (author), Čadež, Simon (author)

Purpose: This study aims to thoroughly investigate the complexity of inflation dynamics in the context of two significant global crises, the COVID-19 pandemic and the ongoing geopolitical tensions in Ukraine. The primary goal is to examine the effects of several factors, such as interest rates, currency indices and unemployment, on inflation during extended periods of noneconomic crises. Design/methodology/approach: This research uses a comprehensive data set spanning 75 months across the USA and the Euro Area, using the Generalized Method of Moments two-step regression methodology for analysis. The study examines the relationships between interest rates, currency indices, unemployment and inflation during extended noneconomic (financial) crises. This rigorous approach offers a nuanced understanding of how these factors interact and influence inflation. Findings: The study highlights the crucial role of interest rates in controlling inflation during crises. Specifically, an interest rate increase of over 1.75% negatively impacts inflation, with more substantial rate hikes having a faster effect. The analysis reveals a minimal correlation between currency devaluation and inflation, emphasizing the predominant influence of interest rates. In addition, a notable negative correlation between unemployment and inflation is observed, indicating that higher unemployment rates tend to coincide with lower inflation levels. Practical implications: The study’s findings offer valuable insights for central banks and policymakers tasked with managing inflation in times of crisis. By underscoring the effectiveness of interest rate adjustments and the limited influence of currency depreciation, this research provides critical guidance for formulating effective monetary policy during economic challenges. Originality/value: This study contributes to existing literature by providing a comprehensive analysis of inflation dynamics during noneconomic crises, using a robust database and using advanced econometric techniques. The findings: provide new insights into the role of interest rates, currency indices and unemployment in shaping inflation dynamics in times of noneconomic crises. These findings enhance the understanding of monetary policy strategies in challenging economic environments.

• Language: English
• Keywords: central banks, interest rate, level of employment, inflation rate, interest rates, currency index, unemployment, non-economic crises
• Work type: Article
• Typology: 1.01 - Original Scientific Article
• Organization: EF - School of Economics and Business
• Publication status: Published
• Publication version: Author Accepted Manuscript
• Year: 2025
• Number of pages: Str. 468-488
• Numbering: Vol. 42, iss. 3
• PID: 20.500.12556/RUL-181655
• UDC: 336.71
• ISSN on article: 1086-7376
• DOI: 10.1108/SEF-04-2024-0246
• COBISS.SI-ID: 217103107
• Publication date in RUL: 10.04.2026

Record is a part of a journal

• Title: Studies in economics and finance
• Shortened title: Stud. econ. financ.
• Publisher: Emerald
• ISSN: 1086-7376
• COBISS.SI-ID: 1087765

Licences

• License: CC BY-NC 4.0, Creative Commons Attribution-NonCommercial 4.0 International
• Link: http://creativecommons.org/licenses/by-nc/4.0/
• Description: A creative commons license that bans commercial use, but the users don’t have to license their derivative works on the same terms.

Secondary language

• Language: Slovenian
• Keywords: centralne banke, obrestna mera, zaposlenost