Euro area inflation differentials: The role of fiscal policies revisited

Arbeitspapier

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.

Object Details

• ISBN: 978-92-899-5516-4
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 2774

Classification and Topics

• Classification: Wirtschaft ; Price Level; Inflation; Deflation ; Fiscal Policy ; Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy ; Macroeconomic Issues of Monetary Unions
• Subject: Fiscal policy ; inflation differentials ; tax policy ; public wages

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Checherita-Westphal, Cristina ; Leiner-Killinger, Nadine ; Schildmann, Teresa
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2023

Further information

• DOI: doi:10.2866/334446
• Handle: http://hdl.handle.net/10419/278345
• Last update: 10.03.2025, 11:45 AM CET