Up, Up and Away? A Price Stability Guide for Policymakers
10 January 2023
Inflation is back with surprising force. Should inflation remain significantly elevated over an extended period, detrimental effects on the EU’s economic model, on growth and on social peace can be expected. A coordinated macroeconomic response is required, combining monetary and fiscal policy. The European Central Bank needs to continue to signal its willingness to stick to its price stability mandate to keep inflation expectations under control. It should not succumb to the goal of fiscal dominance by targeting public debt sustainability more than price stability. This would imply giving up its independence. Fiscal policy should facilitate the objective of monetary policy to target inflation while minimising the impact on economic growth. To reduce the danger of a wage–price spiral, fiscal policy should strive to limit the impact of extreme price rises and should be targeted towards those members of society most affected by the higher prices. In contrast, general expenditure increases or tax reductions for an extended period of time carry the danger of overburdening governments. Price interventions should be the very last option, as they decrease the incentive to reduce the demand for higher priced goods and thus do not allow for the signalling power of prices regarding scarcity. Due to high inflation rates and supply-side constraints, it is currently not the right time for a fiscal demand stimulus.
Thinking Talks Ep.9 – ‘The Spectre of a new Banking Crisis’ with MEP Luděk Niedermayer
Multimedia - Thinking Talks
31 Mar 2023