About the risks of fiscal inflation, a comparison between the euro area and the US: The recommendations of the Taylor rule

Details

Supervisors

Oikonomou, Rigas

Faculty

Faculté des sciences économiques, sociales, politiques et de communication

Degree label

Master [120] en sciences économiques, orientation générale, à finalité spécialisée

Abstract

The surge in inflation in 2021-22 and the slow response of central banks, both in the US and in the euro area, is raising questions about the willingness of authorities to fight effectively to maintain price stability. While the theory of monetary and fiscal policy interaction suggests combined action to achieve the inflation target, the sustainability of public debt could be a brake, especially in Europe. However, the Fed and the ECB have a different view of the situation. A significant increase in interest rates would only weaken the economic recovery, and given the origins of inflation, such an increase is not necessary. They claim that the rise in prices is only temporary and will slow down as soon as the disruptions in supply chains and the fiscal stimulus measures fade away. This paper found that their scenario is indeed plausible and has been successful so far in convincing markets and consumers. On the other hand, it implies a historically weak monetary policy response that contravenes the recommendations of the Taylor Rule. Moreover, the signs of improvement are not yet evident and the uncertainties surrounding the future remain high.

Citations

• APA

Vansnick, B. (2022). About the risks of fiscal inflation, a comparison between the euro area and the US: The recommendations of the Taylor rule. https://dial-mem.test.bib.ucl.ac.be/handle/2078.2/29913