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Fiscal policy during the cost-of-living crisis

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We study the household welfare effects of fiscal support during the 2021-2023 inflation surge. We compare two common policy responses: temporary VAT cuts on food and energy, and expansions of means-tested transfers. Using a quantitative heterogeneous-household model of saving, expenditure composition, and labour supply, we find that VAT cuts generate meaningful welfare gains, but these gains accrue mainly to pensioners and higher-wealth households. A revenue-neutral expansion of means-tested transfers delivers about twice the aggregate welfare gains and spreads them more evenly across households. More broadly, the paper shows that the form of fiscal relief is central to its aggregate and distributional effects during inflation surges.

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  • Pidkuyko Myroslav & Rossi Raffaele, 2026. "Fiscal policy during the cost-of-living crisis," JRC Working Papers on Taxation & Structural Reforms 2026-08, Joint Research Centre.
    • Handle: RePEc:ipt:taxref:202608
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    File URL: https://publications.jrc.ec.europa.eu/repository/handle/JRC146789
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    1. Filippo Pallotti & Gonzalo Paz-Pardo & Jiri Slacalek & Oreste Tristani & Giovanni L. Violante, 2024. "Who Bears the Costs of Inflation? Euro Area Households and the 2021–2023 Shock," NBER Chapters, in: Inflation in the COVID Era and Beyond, National Bureau of Economic Research, Inc.
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