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The fiscal sources of euro area inflation through the lens of the Bernanke-Blanchard model

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  • Bonam, Dennis
  • Checherita-Westphal, Cristina
  • Pacheco, Mariana Montserrat Cerra

Abstract

We estimate the contribution of discretionary fiscal policy measures to euro area inflation in the post-pandemic era using an extension of Bernanke and Blanchard (2024b)’s semi-structural model. Since the pandemic, aggregate discretionary fiscal measures had a modest yet progressively increasing positive contribution to inflation that partly worked through an indirect effect on wage growth and inflation expectations. However, net indirect taxes helped to contain inflationary pressures, both during the pandemic and energy crises. Fiscal policy, therefore, can be a powerful tool to smooth the inflationary effects of adverse supply shocks, yet may also increase inflation persistence if fiscal stimulus is not timely withdrawn. JEL Classification: C5, E32, E47, E62

Suggested Citation

  • 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.
    • Handle: RePEc:ecb:ecbwps:20253153
    Note: 1790315
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    References listed on IDEAS

    as
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    Keywords

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    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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