Fiscal Policy and Inflation in the Euro Area
Gepubliceerd: 25 november 2024
We investigate the relationship between fiscal policy and inflation dynamics in the Euro Area, with a focus on the post-pandemic inflation surge. Using a BVAR identified via sign restrictions, we disentangle the effects of various demand- and supply-side shocks, including fiscal policy, on inflation. First, while both positive demand and adverse supply shocks contributed to the inflation surge, demand shocks were relatively more important. Second, fiscal stimulus played a substantial and progressively increasing role, particularly in influencing domestic-based measures of inflation. Finally, the relative impact of fiscal shocks on inflation dynamics varies across (selected) Euro Area countries.
Keywords: E30; E31;E50
JEL codes inflation; fiscal policy; monetary policy; global supply chain pressures,;vector autore- gression
Working paper no. 820
820 - Fiscal Policy and Inflation in the Euro Area
Research highlights
- Prevailing narrative: EA inflation was largely driven by supply shocks, while US inflation was mainly fueled by demand forces
- Specifically, in the US big fiscal expansion, small role for fiscal policy in the EA
- We quantify empirically the effects of fiscal shocks on EA inflation, using Bayesian structural VAR analysis with six different shocks
- Contrary to the prevailing narrative fiscal policy shocks significantly contributed to the EA inflation surge
- The contribution has been delayed and gradual, as features of NEXTGENEU and the suspension of the SGP would suggest
- Both demand and supply shocks played a sizeable role, with demand shocks being relatively more important
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