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

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

No 3153, Working Paper Series from European Central Bank

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effects of adverse supply shocks, yet may also increase inflation persistence if fiscal stimulus is not timely withdrawn.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

Keywords: fiscal policy; inflation; semi-structural model (search for similar items in EconPapers)
Date: 2025-11
New Economics Papers: this item is included in nep-eec, nep-inv and nep-mon
Note: 1790315
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