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U.S. and Euro Area Monetary and Fiscal Interactions During the Pandemic: A Structural Analysis

U.S. and Euro Area Monetary and Fiscal Interactions During the Pandemic: A Structural Analysis

Author/Editor:


Andrew Hodge
;
Zoltan Jakab
;
Jesper Lindé
;
Vina Nguyen



Publication Date:


November 11, 2022

Electronic Access:


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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.


Summary:

This paper employs a two-country New Keynesian DSGE model to assess the macroeconomic impact of the changes in monetary policy frameworks and the fiscal support in the U.S. and euro area during the pandemic. Moving from a previous target of “below, but close to 2 percent” to a formal symmetric inflation targeting regime in the euro area or from flexible to average inflation targeting in the U.S. is shown to boost output and inflation in both regions. Meanwhile, the fiscal packages approved in the U.S. and the euro area, and a slower withdrawal of fiscal support in the euro area, have a similar impact on output and inflation as changing the monetary policy frameworks . Simultaneously implementing these policies is mutually reinforcing, but insufficient to fully explain the unexpected increase in core inflation during 2021.

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