The Effects of High Inflation on Public Finances in the Euro Area

64 Pages Posted: 1 Nov 2023

See all articles by Krzysztof Bańkowski

Krzysztof Bańkowski

European Central Bank (ECB)

Cristina D. Checherita-Westphal

European Central Bank (ECB)

Julia Jesionek

Ghent University - Department of General Economics; European Central Bank (ECB)

Philip Muggenthaler

European Central Bank (ECB)

Clémence Briodeau

European Central Bank (ECB)

Ruben Schoonackers

Nationale Bank van België

Jan Kuckuck

Deutsche Bundesbank

Katri Urke

Bank of Estonia; Tallinn University of Technology (TUT)

Ronan Hickey

Central Bank of Ireland

Dimitrios Papaoikonomou

Bank of Greece

Jorge Martínez-Pagés

Banco de España

Katja Schmidt

Banque de France

Francesco Caprioli

Bank of Italy

Aris Avgousti

Central Bank of Cyprus

Baiba Brusbārde

Latvijas Banka

Viktorija Strazdaite

Bank of Lithuania

Olivier Delobbe

Banque Centrale du Luxembourg

Kurt Sant

Central Bank of Malta

Jip Italianer

De Nederlandsche Bank

Doris Prammer

Austrian National Bank

Date Written: October, 2023

Abstract

The recent spike in inflation, unprecedented in the history of the Economic and Monetary Union (EMU), has had major consequences for all areas of the economy, including public finances. This paper aims to provide a detailed assessment of the effects of high inflation on fiscal accounts in the euro area. Relying on the wealth of expertise in the Eurosystem – within the Working Group on Public Finance – it documents spending indexation arrangements in all euro area countries. Thanks to this knowledge, the ECB’s fiscal projection platform, which is the primary evaluation tool for this study, establishes a realistic link between prices and fiscal variables. The results of this paper bring into question the conventional wisdom on the overall positive effects of inflation on fiscal accounts. Indeed, the simulations point to adverse effects from the recent inflation surge, mainly triggered by an external supply shock, on budget balances during 2022-24.

Keywords: euro area, fiscal policy, inflation, macroeconomic simulations

JEL Classification: C3, E3, E6

Suggested Citation

Bańkowski, Krzysztof and Checherita-Westphal, Cristina D. and Jesionek, Julia and Muggenthaler, Philip and Briodeau, Clémence and Schoonackers, Ruben and Kuckuck, Jan and Urke, Katri and Hickey, Ronan and Papaoikonomou, Dimitrios and Martínez Pagés, Jorge and Schmidt, Katja and Caprioli, Francesco and Avgousti, Aris and Brusbārde, Baiba and Strazdaite, Viktorija and Delobbe, Olivier and Sant, Kurt and Italianer, Jip and Prammer, Doris, The Effects of High Inflation on Public Finances in the Euro Area (October, 2023). ECB Occasional Paper No. 2023/332, Available at SSRN: https://ssrn.com/abstract=4619695 or http://dx.doi.org/10.2139/ssrn.4619695

Krzysztof Bańkowski (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Cristina D. Checherita-Westphal

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Julia Jesionek

Ghent University - Department of General Economics ( email )

Hoveniersberg 24
Ghent, 9000
Belgium

European Central Bank (ECB)

Philip Muggenthaler

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Clémence Briodeau

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Ruben Schoonackers

Nationale Bank van België ( email )

Jan Kuckuck

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Katri Urke

Bank of Estonia ( email )

Estonia Building 13
15095 Tallinn
Estonia

Tallinn University of Technology (TUT)

Ehitajate tee 5
Tallinn, 12618
Estonia

Ronan Hickey

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2
Ireland

Dimitrios Papaoikonomou

Bank of Greece ( email )

21 E. Venizelos Avenue
GR 102 50 Athens
Greece

Jorge Martínez Pagés

Banco de España ( email )

Madrid 28014
Spain

Katja Schmidt

Banque de France ( email )

Paris
France

Francesco Caprioli

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Aris Avgousti

Central Bank of Cyprus ( email )

80 Kennedy Ave
1076 Nicosia
Cyprus

Baiba Brusbārde

Latvijas Banka ( email )

Riga
Latvia

Viktorija Strazdaite

Bank of Lithuania ( email )

Totoriu 4
Vilnius, LT-01121
Lithuania

Olivier Delobbe

Banque Centrale du Luxembourg ( email )

2, boulevard Royal
Luxembourg, L-2983
Luxembourg

Kurt Sant

Central Bank of Malta ( email )

Valletta, 1060
Malta

Jip Italianer

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Doris Prammer

Austrian National Bank ( email )

Otto-Wagner-Platz, 3
Wien, 1090
Austria

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