Could a Fiscal Boost Raise Inflation in the Euro Area?

This is a preview from the National Institute Economic Review, November 2019, no 250.

The issue of whether fiscal and monetary policy should be coordinated is a hotly debated topic in the Euro Area. In September, the ECB cut the deposit interest rate and announced a new Quantitative Easing programme. However, the expansionary monetary policy risks might not be enough to push inflation up to its objective of below, but close to, 2 per cent over the medium term. At a speech at the Academy of Athens on 1 October, the President of the ECB, Mario Draghi, called for a Euro Area fiscal stimulus to supplement the monetary stimulus: “Fiscal policy playing a more supportive role alongside monetary policy would lead to a faster return to price stability and therefore fewer side effects”.

In this box, prepared by NIESR Senior Economist Cyrille Lenoel, we examine whether the Euro Area has some fiscal room to implement a counter-cyclical fiscal policy.