2023-08-31-IMF-Unconventional_Fiscal_Policy_in_Times_of_High_Inflation_61页_1mb

Summary

This working paper examines the impact of unconventional fiscal policies on high inflation, using cases from the euro area and the United States. Key points include:

• Unconventional Fiscal Policies: Defined as expansionary measures (e.g., energy subsidies, price caps, tax cuts) aimed at reducing the effects of energy price shocks. Examples include household transfers and targeted support in Europe.

• Effectiveness in Reducing Inflation:

  • In the euro area, these policies reduced headline inflation by 1-2 percentage points in 2022 and helped stabilize core inflation and expectations. They smoothed inflation paths, preventing excessive overshoots or undershoots.
  • Mechanisms: Direct reduction of energy costs and indirect pass-through effects suppressed core inflation initially. However, cumulative effects were modest, and a withdrawal of subsidies could lead to inflation rebounding later.

• Contextual Factors:

  • Euro Area: Inflation driven by energy shocks (e.g., post-Ukrainian war disruptions), with policies mitigating but not eliminating core inflation increases.
  • United States: Policies could have been counterproductive due to high economic overheating, exacerbating inflation through demand-side effects. Highlighted the role of Phillips curve nonlinearities.

• Model-Based vs. Empirical Insights:

  • Semi-structural models (e.g., IMF's FSGM) showed small cumulative effects but inflation smoothing.
  • Empirical Phillips curve analysis revealed divergent drivers: Euro area focused on energy pass-through, U.S. on labor market tightness. Nonlinearities in curves indicate that policy effectiveness depends on economic conditions.

• Policy Implications:

  • UFP is effective in temperate economies with temporary shocks but risky in overheated or persistent shock scenarios.
  • Considerations include fiscal sustainability, targeting, and elasticity effects. Coordination in integrated markets (e.g., energy) is crucial to avoid spillovers.
  • Deficit financing amplifies costs, and measures should be state-dependent. Luck (e.g., energy prices falling) offset policy effects in some cases.

• Key Takeaways:

  • Unconventional fiscal tools can stabilize short-term inflation but are not a universal antidote. Their success relies on timely, targeted, and context-specific deployment.
  • Policymakers must balance immediate relief with medium-term fiscal and inflation credibility, accounting for global interconnectedness.

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