These interest rate components are assumed to have identical effects on aggregate demand, with the parameter σ determining the sensitivity of aggregate demand to either component (n..b., interest rates are expressed in percentage points deviation from the steady state).
In January 2017, goods and services in Germany were 1.9% more expensive than one year earlier. In the euro area as a whole, too, the rate of inflation jumped to 1.8%. However, this is primarily due to higher oil prices and the fact that prices bottomed out one year ago.