Inflation and the role of macroeconomic policies: A model for the case of Denmark

Hamid Raza, Thibault Laurentjoye, Mikael Randrup Byrialsen and Sebastian Valdecantos

Structural Change and Economic Dynamics, 2023, vol. 67, issue C, 32-43

Abstract: This paper provides an assessment of the different channels through which monetary, fiscal and income policies affect prices and output in a small open economy and discuss which policy measures are effective and feasible in the face of inflationary shocks. We build a stock-flow-consistent model using sectoral data for Denmark. We then replicate the inflationary environment faced by Denmark and several other countries after the Covid-19 crisis. While taking monetary tightening as a forced policy response for a small open economy with fixed exchange rate, we explore a number of policies that, within the current institutional and legal framework, can potentially mitigate the effects of inflation. Our conclusion is that a close coordination of fiscal and income policies can help reduce the effects of adverse shocks to income without increasing inflation. Furthermore, we find that of all the policies implemented, monetary policy has the most dramatic effects on public debt sustainability.

Keywords: Inflation; Fiscal policy; Monetary policy; Income policy; Stock-flow consistent model (search for similar items in EconPapers)
JEL-codes: E12 E52 E61 E64 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:streco:v:67:y:2023:i:c:p:32-43

DOI: 10.1016/j.strueco.2023.06.006

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