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Fiscal drag, discretionary policy measures and the purchasing power of Italian households in 2022-2025

Author

Listed:
  • Nicola Curci

    (Bank of Italy)

  • Antonella Tomasi

    (Bank of Italy)

Abstract

This paper analyses the dynamics of household disposable income during and after the 2022–2023 inflationary shock. Using a microsimulation approach based on Banca d'Italia's BIMic model, we decompose changes in disposable income into four components: (i) nominal income adjustments to inflation; (ii) real income growth; (iii) fiscal drag and benefit erosion; and (iv) policy interventions. Our results indicate that, on average, household purchasing power eventually returned to pre-crisis levels in 2025. Over 2022-2025, disposable income growth was slightly higher than inflation for households in the three middle income quintile groups. It was broadly in line with inflation for the bottom quintile and fell slightly short of it for the top quintile.

Suggested Citation

  • Nicola Curci & Antonella Tomasi, 2026. "Fiscal drag, discretionary policy measures and the purchasing power of Italian households in 2022-2025," Questioni di Economia e Finanza (Occasional Papers) 998, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_998_26
    as

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    References listed on IDEAS

    as
    1. Sebastian Beer & Mark Griffiths & Alexander Klemm, 2023. "Tax distortions from inflation: What are they? How to deal with them?," Public Sector Economics, Institute of Public Finance, vol. 47(3), pages 353-386.
    2. Nicola Curci & Marco Savegnago & Giordano Zevi & Roberta Zizza, 2025. "The redistributive effects of inflation: a microsimulation analysis for Italy," International Journal of Microsimulation, International Microsimulation Association, vol. 18(3), pages 87-100.
    3. Friedrich Heinemann, 2001. "After the death of inflation: will fiscal drag survive?," Fiscal Studies, Institute for Fiscal Studies, vol. 22(4), pages 527-546., December.
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    Keywords

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    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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