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Inflation, fiscal policy and inequality

Author

Listed:
  • Sara Riscado
  • Antonio F. Amores
  • Henrique Basso
  • Johannes Simeon Bischl
  • Paola De Agostini
  • Silvia De Poli
  • Emanuele Dicarlo
  • Maria Flevotomou
  • Maximilian Freier
  • Sofia Maier
  • Esteban Garcia-Miralles
  • Myroslav Pidkuyko
  • Mattia Ricci

Abstract

Following the inflation surge in the aftermath of the pandemic crisis, governments adopted a large array of fiscal measures to cushion its impact on households and firms. In the euro area, discretionary fiscal measures are estimated to amount to around 2% of GDP, in both 2022 and 2023. In the analysis of the impact of inflation and related fiscal measures the distributional dimension is particularly relevant, since the sudden and strong increase in prices affected families differently depending on their position in the income distribution. Furthermore, the evaluation of the cost of fiscal measures and their targeting is fundamental to improve the efficiency and effectiveness of policy interventions. Using a microsimulation approach, this paper uncovers the aggregate and distributional impact of high consumer inflation, as well as the impact of the government measures aimed at supporting households and containing prices. This analysis is carried out for 2022 and includes Germany, France, Italy, Spain, Portugal and Greece, which together proxy for the euro area. Our work confirms that the purchasing power and welfare of lower-income households was more severely affected by the 2022 inflation surge than that of high-income households. Fiscal measures contributed significantly to closing the inflation gap, though with country differences. However, most fiscal measures were not particularly targeted to low-income households, implying a low cost-effectiveness in protecting the poorest in some countries.

Suggested Citation

  • Sara Riscado & Antonio F. Amores & Henrique Basso & Johannes Simeon Bischl & Paola De Agostini & Silvia De Poli & Emanuele Dicarlo & Maria Flevotomou & Maximilian Freier & Sofia Maier & Esteban Garcia, 2024. "Inflation, fiscal policy and inequality," Working Papers w202424, Banco de Portugal, Economics and Research Department.
  • Handle: RePEc:ptu:wpaper:w202424
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    Cited by:

    1. Sologon, Denisa Maria & Doorley, Karina & O'Donoghue, Cathal, 2024. "Gender Disparities in Inflation during the Cost-of-Living Crisis in Europe: A Novel Decomposition," IZA Discussion Papers 16860, Institute of Labor Economics (IZA).
    2. Cathal ODonoghue & Beenish Amjad & Jules Linden & Nora Lustig & Denisa Sologon & Yang Wang, 2023. "The Distributional Impact of Inflation in Pakistan: A Case Study of a New Price Focused Microsimulation Framework, PRICES," Papers 2310.00231, arXiv.org, revised Mar 2024.
    3. Pallotti, Filippo & Paz-Pardo, Gonzalo & Slacalek, Jiri & Tristani, Oreste & Violante, Giovanni L., 2024. "Who bears the costs of inflation? Euro area households and the 2021–2023 shock," Journal of Monetary Economics, Elsevier, vol. 148(S).
    4. O'Donoghue, Cathal & Can, Zeynep Gizem & Montes-Viñas, Ana & Sologon, Denisa Maria, 2025. "Macro-Economic Change and Household Financial Strain in Europe 2006-2022," IZA Discussion Papers 17739, Institute of Labor Economics (IZA).
    5. repec:ptu:bdpart:e202412 is not listed on IDEAS
    6. Sara Riscado & Sharmin Sazedj & Lara Wemans, 2024. "The personal income tax in Portugal: from the sovereign debt crisis to the inflationary shock," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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