Euro Area inflation differentials: the role of fiscal policies revisited

Cristina Checherita-Westphal, Nadine Leiner-Killinger and Teresa Schildmann
Authors registered in the RePEc Author Service: Cristina Checherita Westphal

No 2774, Working Paper Series from European Central Bank

Abstract: This paper provides a comprehensive empirical analysis of the role of discretionary fiscal policy for inflation differentials across the 19 euro area countries over the period 1999-2019. The results confirm existing (older) literature that it is difficult to find robust evidence of the fiscal policy stance or impulse impacting directly on inflation differentials. We do find, however, support for an indirect effect of discretionary fiscal policy on inflation differentials working through the output gap channel. There is also some evidence that fiscal policy may be especially potent in influencing inflation differentials – with fiscal tightening cooling (and fiscal expansion increasing) inflation pressures – when the economy is above its potential. Finally, going from the overall fiscal stance or impulse to individual fiscal instruments, we find that value added tax (VAT) rate changes and public wage growth are statistically significant determinants of inflation differentials in our sample. JEL Classification: E31, E62, E63, F45

Keywords: fiscal policy; inflation differentials; public wages; tax policy (search for similar items in EconPapers)
Date: 2023-02
New Economics Papers: this item is included in nep-eec, nep-mon and nep-pbe
Note: 1790315
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20232774

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