The Short-Term Impact of Government Budgets on Prices: Evidence from Macroeconomic Models

51 Pages Posted: 13 Dec 2004

See all articles by Jerome Henry

Jerome Henry

European Central Bank (ECB)

Pablo Hernández de Cos

Banco de España

Sandro Momigliano

Bank of Italy

Date Written: October 2004

Abstract

This paper reviews the existing empirical evidence on the short-term impact on prices of fiscal variables and assesses it against new results from harmonised simulations, conducted with six well-established econometric models used by the ECB and five national central banks (NCBs) of the Eurosystem. The outcome is also compared with results from the European Commission and the OECD models. Overall, a broad consensus appears on the impact on prices of changes in individual government budget items in the euro area. In all cases, changes in government demand and in direct taxes paid by households have a limited impact on prices in the first year while, in contrast, changes in indirect taxes and employers' social security contributions have a relatively large impact. The second year results show that the effects on prices usually take some time to materialise fully; in particular, they often become large for the public consumption shock.

Keywords: Euro area, model simulations, fiscal policy, prices

JEL Classification: E17, E31, E62

Suggested Citation

Henry, Jerome and Hernández de Cos, Pablo and Momigliano, Sandro, The Short-Term Impact of Government Budgets on Prices: Evidence from Macroeconomic Models (October 2004). Available at SSRN: https://ssrn.com/abstract=587263

Jerome Henry (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 7614 (Phone)
+49 69 1344 6575 (Fax)

Pablo Hernández de Cos

Banco de España ( email )

Madrid, 28014
Spain

Sandro Momigliano

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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