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The Fiscal Consequences of Missing an Inflation Target

Author

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  • Rey, Hélène
  • Andreolli, Michele

Abstract

The European Central Bank is unique in setting monetary policy for several sovereign states with heterogeneous debt levels and different maturity structures. The monetary-fiscal nexus is central to the functioning of the euro area. We focus on one particular aspect of that nexus, the effect of the reliability of the European Central Bank monetary policy on public finances. We show that when the ECB misses its inflation target this has large heterogeneous fiscal consequences for Euro Area countries. For comparison we estimate the fiscal consequences of persistent misses of their inflation target by the US Federal Reserve and the Bank of England: they are also large.

Suggested Citation

  • Rey, Hélène & Andreolli, Michele, 2023. "The Fiscal Consequences of Missing an Inflation Target," CEPR Discussion Papers 17826, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17826
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    File URL: https://cepr.org/publications/DP17826
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    Cited by:

    1. Bańkowski, Krzysztof & Checherita-Westphal, Cristina & Jesionek, Julia & Muggenthaler, Philip & Frutos, Mario Alloza & Avgousti, Aristoklis & Briodeau, Clémence & Brusbārde, Baiba & Caprioli, Francesc, 2023. "The effects of high inflation on public finances in the euro area," Occasional Paper Series 332, European Central Bank.

    More about this item

    Keywords

    Inflation expectations; Inflation target; Fiscal costs;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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