This reduces the effect on inflation by 15 basis points after one year, pointing to pronounced second-round effects via price setting and wage bargaining.

To distinguish between first- and second-round effects, we conduct a counterfactual analysis, in which we impose that inflation expectations are insensitive to natural gas price shocks.

We find that inflation and inflation expectations are indeed sensitive to natural gas price shocks. A 10% increase in natural gas prices raises inflation by 8 basis points on impact. Inflation increases further to 22 basis points after about one year, suggesting a role for second-round effects.

Short summary: In this article, we investigate the recent hike in energy prices, in particular natural gas prices, and how it affects inflation expectations and inflation in the euro area.

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importance of different belief formation mechanisms. We examine differences in the contemporaneous effects when we identify the model via a set of belief formation mechanisms.

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pessimistic credit market environment. While an unexpected movement in the optimistic regime leads to a rather muted impact on output and credit, we find a significant negative impact on these variables in the pessimistic regime. In the paper we also investigate the

we investigate whether and how credit market sentiment and investor beliefs affect key macroeconomic variables. We are particularly interested in asymmetries in the transmission channel. An unexpected credit market sentiment shock has different impacts in an optimistic and