This might explain some of the differences between monetary policy in the US and the euro area. In the former, where markets are more flexible, the Federal Reserve may be able to cut interest rates in response to the economic slowdown at an earlier stage, because that slowdown is expected to bring about a rapid adjustment in pricing behaviour and expectations.
In the euro area, however, price and wages tend to follow the cycle with a lag, and tend to keep rising for some time even after the slowdown starts. 8  See Peersman and Smets (2001). 9  See Boivin, Giannoni and Mojon (2009).