Did expansionary fiscal and monetary policies cause the inflation surge?

This paper employs a two-country New Keynesian DSGE model to assess how much of the 2021–2 inflation surge in the US and the euro area is explained by changes in monetary policy frameworks and fiscal support during the pandemic. We demonstrate that the outcome depends on how monetary and fiscal policies interact within and across countries, and on whether the slope of the Phillips curve has shifted in recent years. Under pre-pandemic flat Phillips curves, the policy changes account for a little more than one-quarter of the core inflation surge in the US and little of the rise in euro area inflation by end-2021. With steeper Phillips curves informed by recent data, these policies explain more than two-thirds of the runup in core inflation in the US and nearly half of the surge in the euro area by the end of 2021. While changing the monetary policy frameworks alone would have been welfare-improving in both regions under the historical flat Phillips curve, combining the new monetary frameworks with fiscal stimulus causes a welfare loss in the US, especially under a steeper Phillips curve.