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Fiscal Policy and Inflation in the Euro Area

Author

Listed:
  • Guido Ascari
  • Dennis Bonam
  • Lorenzo Mori
  • Andra Smadu

Abstract

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.

Suggested Citation

  • Guido Ascari & Dennis Bonam & Lorenzo Mori & Andra Smadu, 2024. "Fiscal Policy and Inflation in the Euro Area," Working Papers 820, DNB.
    • Handle: RePEc:dnb:dnbwpp:820
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    References listed on IDEAS

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    Cited by:

    1. Bonam, Dennis & Checherita-Westphal, Cristina & Pacheco, Mariana Montserrat Cerra, 2025. "The fiscal sources of euro area inflation through the lens of the Bernanke-Blanchard model," Working Paper Series 3153, European Central Bank.
    2. Fosso, Luca, 2025. "Decomposing US economic fluctuations: a trend-cycle approach," Working Paper Series 3138, European Central Bank.
    3. Anttonen, Jetro & Lehmus, Markku, 2025. "Geopolitical surprises and macroeconomic shocks: A tale of two events," Bank of Finland Research Discussion Papers 5/2025, Bank of Finland.
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    Keywords

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    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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