measured relative to a year earlier (to eliminate seasonality).<sup>20</sup> Details on sources and definitions are in Appendix Table 2.<sup>21</sup> We focus on the evolution of each of these variables from 1-year before the turning point of the rate cycle through 3-years after, with the start of each easing or tightening phase denoted as t=0. For countries in the euro area, we include each member country individually for any phases beginning before 1999 when the euro area came into existence, but only include data for the euro area as a whole for phases beginning from 1999.

Charts 4 and 5 show the evolution of these macroeconomic variables during the rate cycles (with tightening and easing phases in Charts 4 and 5, respectively). The graphs include the mean (purple) and median (red) for the entire sample of country-phases identified over the full period from January 1970-March 2024 (the latest available for most countries), as well as the upper and lower quartiles of the distribution (dashed black lines). The patterns for economic activity and the labor market closely mirror results from the business cycle literature. Activity is accelerating and the labor market tightening (based on unemployment falling or employment increasing) before the start of tightening phases, with the opposite before easing phases. After interest rates begin rising (at the start of tightening phases), activity and the labor market continue to have positive momentum for roughly 6 months, but then activity begins to slow and the labor market softens, presumably reflecting in part the lagged effects of tightening monetary policy.

Similarly, after interest rates are decreased (i.e., the start of easing phases), activity and the labor market continue to soften for roughly 6 months, and then gradually recover as the easing takes effect with a lag. By three years after the start of the phase, the mean and median measures of activity and the labor market generally settle back around where they began one year before t=0, except that GDP and IP growth settle slightly below their starting points after a tightening phase. These results are broadly consistent with the forward-looking and counter-cyclical nature of monetary policy, as well as with estimates of the length of transmission lags.<sup>22</sup> The means and medians follow very similar patterns—suggesting any skews in the distribution are roughly balanced between positive and negative outcomes.

The evolution of inflation (both headline and core) displays notably different patterns. The pickup in inflation before the start of tightening phases, and deceleration before the start of easing phases, is more muted than occurs for the other macroeconomic variables. After interest rates are increased (at the start of tightening phases), mean inflation continues to pick up for longer than 6 months and only declines very gradually; median inflation barely moves. After interest rates are cut, mean and median inflation continue to fall for an extended period, but only very slowly.

> 20 Macroeconomic data was collected on 31 May 2024 and covers the period from January 1970 through March 2024 for most countries.

> 21 All variables are measured relative to a year earlier, with the unemployment rate measured as the change (instead of percent change). Data for some variables is limited early in the sample. We only include economies in the calculation of the sample statistics if the relevant data is available for at least 6-months before t=0.

> 22  See Clarida, Gali, and Gertler (1998), Woodford (2003), and Lane (2022), among many others, for a discussion of these topics. Havranek and Rusnak (2013), using a meta-analysis based on 67 studies, reports that the average transmission lag of monetary policy to inflation is 29 months (ranging from 18 to 49 months).

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