The European Central Bank published a working paper that extends the Bernanke-Blanchard semi-structural model to quantify how discretionary fiscal policy contributed to euro area inflation during and after the pandemic. The authors estimate that aggregate discretionary fiscal measures made a modest but increasingly positive contribution to inflation after 2020, partly via higher wage growth and short-term inflation expectations, while changes in net indirect taxes (net of subsidies) helped contain inflationary pressures during the pandemic and energy crises. The paper is presented as research and does not represent the ECB’s views. Using quarterly euro area data from 1999Q1 to 2023Q2 and a Eurosystem expert-based series of discretionary fiscal measures, the model-based decompositions put the average fiscal contribution to inflation at around 0.4 percentage points in 2021 and almost 1 percentage point in 2022, easing to about 0.3 percentage points in 2023. Disaggregating fiscal measures suggests net indirect taxes contributed negatively to inflation (and wage growth) through 2023, offsetting the mostly positive contribution from other discretionary measures since 2020, which peaked at almost 1 percentage point in 2022. Wage growth emerges as a key transmission channel for fiscal policy into inflation, with a notable effect on short-term inflation expectations but a very limited impact on long-term expectations, which remain broadly anchored; commodity price shocks and supply shortages still account for most of the inflation surge in the framework. Robustness checks extending the sample to 2024Q3 and using constant-tax energy and food price indices are reported as broadly consistent with the main results, and the paper flags further work on endogenising labour market tightness, separating specific pandemic support instruments, controlling for monetary policy shocks and reconciling euro area aggregates with country-level estimates.
European Central Bank 2025-11-17
European Central Bank working paper estimates discretionary fiscal measures added almost 1 percentage point to euro area inflation in 2022 while net indirect tax cuts restrained pressures
The European Central Bank published a working paper extending the Bernanke-Blanchard model to assess discretionary fiscal policy's impact on euro area inflation post-pandemic. The study finds fiscal measures contributed modestly to inflation, peaking at nearly 1 percentage point in 2022, with wage growth as a key transmission channel. Net indirect taxes helped contain inflation, while commodity price shocks and supply shortages were primary inflation drivers.