IMF Working Papers

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

By Andrew Hodge, Zoltan Jakab, Jesper Lindé, Vina Nguyen

November 11, 2022

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Andrew Hodge, Zoltan Jakab, Jesper Lindé, and Vina Nguyen. U.S. and Euro Area Monetary and Fiscal Interactions During the Pandemic: A Structural Analysis, (USA: International Monetary Fund, 2022) accessed November 21, 2024

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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.

Keywords: DSGE Model, Fiscal Policy, Monetary Policy

Publication Details

  • Pages:

    47

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2022/222

  • Stock No:

    WPIEA2022222

  • ISBN:

    9798400219818

  • ISSN:

    1018-5941