Not only the ECB, fiscal policy is also needed to cure inflation

Not only the ECB, fiscal policy is also needed to cure inflation

How did inflation rise so fast in the Eurozone? The most widespread opinion is that the price increase is attributable to two factors: the first is the supply bottlenecks generated by Covid, the second is the energy shock produced by the war in Ukraine. This narrative, dominant in the last year, has repercussions on the role of monetary and fiscal policies, ie on the management of aggregate demand. On the one hand, in fact, it has convinced that rates can remain relatively low since the recent drop in energy prices, it is said, will have disinflationary effects not only on total inflation but also on the underlying component. On the other he suggested that the role of fiscal policy is to balance the recessionary implications of monetary tightening and energy prices with subsidies of various types. This narrative could have been fine a year ago, but the evidence of the data has been suggesting a rethinking for months now (as already explained in the December 17 sheet).

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