## sipea2023004

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---

### Inflation in Hungary and Europe — Summary of recent developments and drivers
- Inflation rose from 2.7 percent y/y in January 2021 to 24.5 percent in December 2022.
- Key contributing factors:
  - Global shocks: COVID-related supply disruptions and a surge in commodity prices (energy and food), amplified by Russia’s war in Ukraine.
  - Domestic policy: an extraordinary loosening of fiscal and monetary policies in 2020, followed by additional fiscal stimulus ahead of the April 2022 elections.
  - External pressures: widening external deficit led by high energy prices, tightening global financial conditions, and disputes with the EU that intensified exchange rate pressure and imported inflation.
- Conclusion: A consistently and persistently tight overall policy mix is needed to drive inflation back to the central bank’s target.

### Shocks and recent events
- Timeline (selected):
  - 2020: extraordinary fiscal and monetary loosening in response to COVID-19.
  - 2021–2022: commodity price spikes, supply bottlenecks, drought, and Russia’s war in Ukraine.
  - Late 2021–early 2022: additional domestic fiscal stimulus (ahead of April 2022 elections).
- Effect on the domestic economy:
  - Stronger-than-expected recovery tightened labor markets and boosted domestic demand.
  - Exchange rate depreciation, higher imported inflation, and higher risk premia.

### Composition of inflation — key statistics and features
- Food inflation:
  - Hungary’s food inflation is the highest in the EU.
  - Domestic drought in 2022 curtailed agricultural production and raised unprocessed food prices.
  - High passthrough from unprocessed to processed foods driven by stronger bargaining power of producers and low productivity in the food processing sector (MNB 2022).
  - Government price caps introduced in February 2022 on six products at October 15, 2021 levels: granulated sugar, wheat flour, sunflower oil, pork leg, some chicken breast and backs, and 2.8% cow milk; later expanded to include eggs and potatoes; cap set to expire in April 2023. Caps were ineffective in slowing broad food inflation.
- Energy prices:
  - Household energy utility price caps since 2014 initially shielded households from wholesale spikes.
  - August 2022: cap increased for consumption above the national average; electricity and gas consumer price inflation jumped from zero to nearly around 30 and 115 percent y/y, respectively, in September (together contributing close to 3 percentage points to headline CPI in September and remaining similar through December).
  - Motor fuels price cap (November 15, 2021–December 6, 2022) was lifted in December 2022; fuel prices jumped by 27 percent y/y in December and contributed close to 2 percentage points to headline CPI y/y that month.
  - Despite these rises, retail energy price levels remain among the lowest in Europe for consumption below the national average, which remains capped.
- Producer prices:
  - Domestic producer price inflation reached nearly 68 percent y/y in October 2022 and was 63.7 percent in November 2022, led by energy and intermediate goods.
  - High correlation between producer and consumer prices suggests most passthrough from production costs has already occurred (MNB 2022).
- Core inflation:
  - Measures of core inflation (excluding unprocessed or both unprocessed and processed foods) are higher in Hungary than in all other EU countries.
  - Services and nonenergy, nonfood goods contributed around 40 percent of headline CPI through December 2022.
  - Services inflation accelerated into double digits since mid-2022; nonenergy, nonfood goods inflation rose faster than peers in Emerging Europe due to second-round effects.

### Inflation drivers: model estimates and stylized facts
- Phillips Curve estimation (panel of 21 advanced and 5 emerging European economies, 2000Q1–2022Q2) — key findings:
  - Past core inflation and three-year-ahead inflation expectations (consensus forecasts) are important drivers of core and headline inflation.
  - External price pressures (commodity food and energy prices, foreign producer prices, exchange rates) are statistically significant.
  - For Hungary, the coefficient on the unemployment gap (based on historical trends) is statistically insignificant in the sample (similar to Bulgaria, Croatia, Poland), likely because the sample covers a period of price stability with declining unemployment from high levels.
  - Model-based baseline: average quarterly inflation expected to decelerate but remain elevated through 2023 (see Appendix I and Figure 8 in the source).
- Stylized labor market and policy facts:
  - Since 2020:Q2, core inflation has become more correlated with the unemployment rate than pre-COVID.
  - Labor market tightness (ratio of job vacancies to unemployment) rose to historically high levels, indicating historically low slack.
  - Private sector wages grew in double digits, outpacing productivity growth and faster than most EU countries (in line with some Emerging Europe peers).
  - Policy stance 2020–2022:
    - Both fiscal and monetary stances were among the most expansionary in the EU over 2020–22.
    - Fiscal policy loosened in 2020 and again in late 2021–early 2022; monetary policy loosened in 2020, with policy rates raised from mid-2021 but liquidity continued via asset purchases until end-2021.
    - A normalized policy stance index (average of cyclically-adjusted fiscal balance and real policy rate, real policy rate measured as average policy rate minus projected inflation one year ahead) indicates the overall policy mix between 2020 and 2022 was the loosest in over two decades and remained loose even as unemployment reached record lows.
    - For the average policy rate in 2022 the authors used the average base rate between January and September and 18 percent for October.
  - Exchange rate passthrough:
    - Historical benchmark for emerging markets: passthrough around 6 percent in the first month and around 20 percent after about one year (Caselli and Roitman 2019).
    - Hungary literature estimates: Hajnal 2015 up to 30 percent after two years; Vonnák 2010 estimated 10 to 20 percent after two years.
    - Updated analysis suggests passthrough to inflation has increased; non-linearities and asymmetries (depreciation vs appreciation, larger impacts for larger depreciations) may amplify effects during recent shocks.

### Inflation outlook and quantified risks
- IMF staff baseline:
  - Headline and core inflation expected to peak in early 2023, then slow as commodity prices retreat, domestic demand cools owing to a tighter policy mix, and high inflation erodes household purchasing power.
  - With persistent core inflation and a tight labor market, inflation is expected to remain elevated and above the MNB’s target until end-2025.
- Principal quantified risks (Phillips Curve simulations, Appendix II):
  - Greater persistence of inflation could add up to 3 percentage points to core inflation in 2023 (mechanism: more backward/less forward-looking expectations and wage pressures, potential wage-price spiral).
  - Tighter labor markets could add up to 2 percentage points to core inflation in 2023.
  - De-anchored inflation expectations are a clear risk but modeled as less potent in Hungary given historically relatively well-anchored past expectations around the MNB target.
  - Other risks include renewed supply-side shocks (e.g., higher commodity prices) and smaller-than-expected slack.

### Policy implications and recommendations on inflation
- Diagnosis:
  - Hungary’s high inflation reflects both supply shocks (commodity price spikes affecting food and energy) and demand-side factors (expansionary fiscal policy, strong domestic demand, tight labor markets, rapid wage growth).
  - Second-round effects from energy prices and persistence of core inflation have reinforced inflation dynamics.
- Policy prescription:
  - Fiscal and monetary policies need to remain consistently tight and complement each other to dampen demand and rein in inflation.
  - The exchange rate should remain free to adjust as needed.
  - Policy adjustments should be data-dependent, distinguishing supply shocks from demand shocks:
    - Supply shocks that increase inflation call for tighter monetary policy and tight fiscal policy while making room to support vulnerable households facing higher costs of living.
    - Demand shocks that lower both output and inflation may warrant a less tight stance to support activity while allowing inflation to fall toward target.
  - Given persistence of core inflation and policy lags, maintaining a tight and consistent policy stance with flexibility to respond to future shocks is critical to ensure inflationary pressures consistently and sustainably ease.

### Price and interest rate caps are costly, ineffective, and undermine monetary and fiscal policy — findings
- Regulatory measures used in response to rising inflation and costs of living included caps on energy and food prices and selected retail interest rates.
- Key findings on effectiveness:
  - Sustaining artificially low prices prevents the demand adjustment needed to cool underlying pressures.
  - Price caps have not been effective in fighting inflation; price caps on selected food produces resulted in higher prices on other products to compensate losses.
  - Energy price caps prevented demand adjustment and led to wider external deficits and greater exchange rate depreciation, which increased inflationary pressure.
  - Interest rate caps undermine monetary policy transmission, disconnecting key channels and eventually requiring greater tightening to achieve the same outcome.
- Example of unsustainability and disruption:
  - The motor fuel price cap was abruptly terminated on December 6, 2022 after it had led to widespread fuel shortages.
- Risk to expectations:
  - By delaying the inevitable inflationary impact, price caps risk ultimately entrenching expectations higher, for longer.

### Fiscal and monetary policy interactions and recommendations regarding caps
- Administrative measures (price and interest rate caps) work at cross purposes with fiscal and monetary tightening.
- Policy trade-off assessment under high uncertainty:
  - The potential costs of under-tightening (including entrenched high inflation and a higher eventual cost of controlling it) outweigh the risks of excessively lowering output through over-tightening.
  - On balance, it seems better to over- than under-tighten to stabilize inflation, re-anchor inflation expectations, and enable a stable environment for recovery.
- Recommendation:
  - To best complement monetary policy in its efforts to support the inflation target, consistency of fiscal policy is crucial while administrative measures should not undermine policy tightening.

### Appendix I — Phillips Curve model results (selected coefficients and diagnostics)
- Model scope: Europe, Emerging Europe, Advanced Europe and country-specific columns including BGR HRV HUN POL ROU.
- Selected estimated coefficients (robust standard errors in parentheses; significance: *** p<0.01, ** p<0.05, * p<0.1):
  - Unemployment Gap:
    - Europe: -0.374*** (0.078)
    - Emerging Europe: -0.676*** (0.179)
    - Advanced Europe: -0.337*** (0.097)
    - Hungary (HUN column shown among country group): -0.139-0.477 (standard-error formatting in source)
  - Lag of Core Inflation:
    - Europe: 0.431*** (0.127)
    - Emerging Europe: 0.581*** (0.105)
    - Advanced Europe: 0.287* (0.161)
    - Hungary: 0.920*** (0.056) and 0.426*** (0.106) in other columns
  - Inflation Expectations: 3 Years Ahead:
    - Europe: 0.569*** (0.127)
    - Emerging Europe: 0.419*** (0.105)
    - Advanced Europe: 0.713*** (0.161)
    - Hungary: 0.0800.574*** (0.056)(0.106) as presented in source
  - Lag of External Price Pressure:
    - Europe: 0.020*** (0.006)
    - Emerging Europe: 0.037** (0.015)
    - Advanced Europe: 0.009* (0.005)
  - Food price contemporaneous coefficient:
    - Europe: 0.127*** (0.034)
    - Emerging Europe: 0.181*** (0.054)
    - Advanced Europe: 0.065*** (0.015)
    - Hungary: 0.042** 0.109*** (0.018)(0.035) as presented in source
  - Lagged food price coefficients (selected lags):
    - Lag of Food Price:
      - Europe: 0.078*** (0.020)
      - Emerging Europe: 0.075*** (0.027)
      - Advanced Europe: 0.054*** (0.020)
    - L2 of Food Price:
      - Europe: 0.032 (0.022)
      - Advanced Europe: 0.045*** (0.015)
    - L3 of Food Price:
      - Europe: 0.070*** (0.021)
      - Emerging Europe: 0.065** (0.032)
      - Advanced Europe: 0.077*** (0.018)
    - L4 of Food Price:
      - Europe: 0.042** (0.017)
      - Emerging Europe: 0.053** (0.026)
      - Advanced Europe: 0.040** (0.019)
  - Energy Price:
    - Europe: 0.016 (0.011)
    - Emerging Europe: 0.021 (0.022)
    - Advanced Europe: 0.032*** (0.008)
- Observations:
  - Europe: 2,210
  - Emerging Europe: 503
  - Advanced Europe: 1,707
  - Country-level columns show smaller observation counts (e.g., 60, 60, 86, 86, 86 in source)
- Model fixed effects:
  - Country FE: Yes for regional columns; No for some country columns per source.
  - Time FE: No for all columns per source.
- Note: Source of model results is IMF Regional Economic Outlook for Europe, October 2022.

### Appendix II — Illustrative inflation risk scenarios (summary)
- Two modeling approaches reported: Phillips Curve Simulations (6-quarter horizon, shocks persist throughout) and DSGE Model Simulations.
- Baseline:
  - WEO July baseline: GAS (energy inflation 69% in 2022, -14.1% in 2023; food inflation 19% in 2022, 2.8% in 2023)
  - In Phillips curve simulations: Cost shock raises inflation to WEO baseline in 2022Q2.
- Scenario shocks (as labeled in Table A.II):
  0. Baseline (WEO) — see Baseline figures above.
  1. Negative supply shocks:
     - Phillips curve: 20 percent rise in energy and food prices.
     - DSGE: Additional inflationary cost shock matching initial shock in Phillips curve simulation.
  2. Positive supply shocks:
     - Phillips curve: 20 percent fall in energy and food prices.
     - DSGE: Deflationary cost shock matching initial shock in Phillips curve simulation.
  3. Looser labor market (More slack than estimated):
     - Phillips curve: 2 percentage points lower unemployment gap.
     - DSGE: 2 percentage points lower output gap than assumed by in monetary policy rule.
  4. Tighter labor market (Less slack than estimated):
     - Phillips curve: 2 percentage points higher unemployment gap.
     - DSGE: 2 percentage points higher output gap than assumed in monetary policy rule.
  5. Inflation expectations de-anchored:
     - Phillips curve: 1 percentage point higher expected inflation.
     - DSGE: Inflation expectations increase inflation in the first period by 1 percentage point.
  6. Increased persistence (Wage-price spiral):
     - Phillips curve: A rise in the coefficient on lagged inflation to 0.95.
     - DSGE: A rise in the coefficient on lagged inflation to 0.8.
- Note: DSGE = dynamic stochastic general equilibrium. Sources for scenarios include IMF, Regional Economic Outlook for Europe, October 2022; IMF, World Economic Outlook database; and IMF staff.

*Source: sipea2023004 — International Monetary Fund, January 17, 2023.*

### 1. Inflation in Hungary and Europe _____________________________________________________ 2

### 1. Inflation in Hungary and Europe

### Summary of recent developments and drivers
- Inflation rose from 2.7 percent y/y in January 2021 to 24.5 percent in December 2022.
- Key contributing factors:
  - Global shocks: COVID-related supply disruptions and a surge in commodity prices (energy and food), amplified by Russia’s war in Ukraine.
  - Domestic policy: an extraordinary loosening of fiscal and monetary policies in 2020, followed by additional fiscal stimulus ahead of the April 2022 elections.
  - External pressures: widening external deficit led by high energy prices, tightening global financial conditions, and disputes with the EU that intensified exchange rate pressure and imported inflation.
- Conclusion: A consistently and persistently tight overall policy mix is needed to drive inflation back to the central bank’s target.

### Shocks and recent events
- Timeline of shocks (selected):
  - 2020: extraordinary fiscal and monetary loosening in response to COVID-19.
  - 2021–2022: commodity price spikes, supply bottlenecks, drought, and Russia’s war in Ukraine.
  - Late 2021–early 2022: additional domestic fiscal stimulus (ahead of April 2022 elections).
- Effect on domestic economy:
  - Stronger-than-expected recovery tightened labor markets and boosted domestic demand.
  - Exchange rate depreciation, higher imported inflation, and higher risk premia.

### Composition of inflation
- Food inflation:
  - Hungary’s food inflation is the highest in the EU.
  - Domestic drought in 2022 curtailed agricultural production and raised unprocessed food prices.
  - High passthrough from unprocessed to processed foods driven by stronger bargaining power of producers and low productivity in the food processing sector (MNB 2022).
  - Government price caps introduced in February 2022 on six products at October 15, 2021 levels: granulated sugar, wheat flour, sunflower oil, pork leg, some chicken breast and backs, and 2.8% cow milk; later expanded to include eggs and potatoes; cap set to expire in April 2023. Caps were ineffective in slowing broad food inflation.
- Energy prices:
  - Household energy utility price caps since 2014 initially shielded households from wholesale spikes.
  - August 2022: cap increased for consumption above the national average; electricity and gas consumer price inflation jumped from zero to nearly around 30 and 115 percent y/y, respectively, in September (together contributing close to 3 percentage points to headline CPI in September and remaining similar through December).
  - Motor fuels price cap (November 15, 2021–December 6, 2022) was lifted in December 2022; fuel prices jumped by 27 percent y/y in December and contributed close to 2 percentage points to headline CPI y/y that month.
  - Despite these rises, retail energy price levels remain among the lowest in Europe for consumption below the national average, which remains capped.
- Producer prices:
  - Domestic producer price inflation reached nearly 68 percent y/y in October 2022 and was 63.7 percent in November 2022, led by energy and intermediate goods.
  - High correlation between producer and consumer prices suggests most passthrough from production costs has already occurred (MNB 2022).
- Core inflation:
  - Measures of core inflation (excluding unprocessed or both unprocessed and processed foods) are higher in Hungary than in all other EU countries.
  - Services and nonenergy, nonfood goods contributed around 40 percent of headline CPI through December 2022.
  - Services inflation accelerated into double digits since mid-2022; nonenergy, nonfood goods inflation rose faster than peers in Emerging Europe due to second-round effects.

### Inflation drivers: model estimates and stylized facts
- Phillips Curve estimation (panel of 21 advanced and 5 emerging European economies, 2000Q1–2022Q2):
  - Past core inflation and three-year-ahead inflation expectations (consensus forecasts) are important drivers of core and headline inflation.
  - External price pressures (commodity food and energy prices, foreign producer prices, exchange rates) are statistically significant.
  - For Hungary, the coefficient on the unemployment gap (based on historical trends) is statistically insignificant in the sample (similar to Bulgaria, Croatia, Poland), likely because the sample covers a period of price stability with declining unemployment from high levels.
  - Model-based baseline: average quarterly inflation expected to decelerate but remain elevated through 2023 (see Appendix I and Figure 8 in the source).
- Stylized facts on labor markets and policy:
  - Since 2020:Q2, core inflation has become more correlated with the unemployment rate than pre-COVID.
  - Labor market tightness (ratio of job vacancies to unemployment) rose to historically high levels, indicating historically low slack.
  - Private sector wages grew in double digits, outpacing productivity growth and faster than most EU countries (in line with some Emerging Europe peers).
  - Policy stance 2020–2022:
    - Both fiscal and monetary stances were among the most expansionary in the EU over 2020–22.
    - Fiscal policy loosened in 2020 and again in late 2021–early 2022; monetary policy loosened in 2020, with policy rates raised from mid-2021 but liquidity continued via asset purchases until end-2021.
    - A normalized policy stance index (average of cyclically-adjusted fiscal balance and real policy rate, real policy rate measured as average policy rate minus projected inflation one year ahead) indicates the overall policy mix between 2020 and 2022 was the loosest in over two decades and remained loose even as unemployment reached record lows.
    - For the average policy rate in 2022 the authors used the average base rate between January and September and 18 percent for October.
  - Exchange rate passthrough:
    - Historical benchmark for emerging markets: passthrough around 6 percent in the first month and around 20 percent after about one year (Caselli and Roitman 2019).
    - Hungary literature estimates: Hajnal 2015 up to 30 percent after two years; Vonnák 2010 estimated 10 to 20 percent after two years.
    - Updated analysis suggests passthrough to inflation has increased; non-linearities and asymmetries (depreciation vs appreciation, larger impacts for larger depreciations) may amplify effects during recent shocks.

### Inflation outlook and quantified risks
- IMF staff baseline:
  - Headline and core inflation expected to peak in early 2023, then slow as commodity prices retreat, domestic demand cools owing to a tighter policy mix, and high inflation erodes household purchasing power.
  - With persistent core inflation and a tight labor market, inflation is expected to remain elevated and above the MNB’s target until end-2025.
- Principal quantified risks (Phillips Curve simulations, Appendix II):
  - Greater persistence of inflation could add up to 3 percentage points to core inflation in 2023 (mechanism: more backward/less forward-looking expectations and wage pressures, potential wage-price spiral).
  - Tighter labor markets could add up to 2 percentage points to core inflation in 2023.
  - De-anchored inflation expectations are a clear risk but modeled as less potent in Hungary given historically relatively well-anchored past expectations around the MNB target.
  - Other risks include renewed supply-side shocks (e.g., higher commodity prices) and smaller-than-expected slack.

### Policy implications and recommendations
- Diagnosis:
  - Hungary’s high inflation reflects both supply shocks (commodity price spikes affecting food and energy) and demand-side factors (expansionary fiscal policy, strong domestic demand, tight labor markets, rapid wage growth).
  - Second-round effects from energy prices and persistence of core inflation have reinforced inflation dynamics.
- Policy prescription:
  - Fiscal and monetary policies need to remain consistently tight and complement each other to dampen demand and rein in inflation.
  - The exchange rate should remain free to adjust as needed.
  - Policy adjustments should be data-dependent, distinguishing supply shocks from demand shocks:
    - Supply shocks that increase inflation call for tighter monetary policy and tight fiscal policy while making room to support vulnerable households facing higher costs of living.
    - Demand shocks that lower both output and inflation may warrant a less tight stance to support activity while allowing inflation to fall toward target.
  - Given persistence of core inflation and policy lags, maintaining a tight and consistent policy stance with flexibility to respond to future shocks is critical to ensure inflationary pressures consistently and sustainably ease.

*Source: International Monetary Fund, January 17, 2023.*

### 17.      Price and interest rate caps are costly, ineffective, and undermine monetary and fiscal

### sipea2023004 - 17.      Price and interest rate caps are costly, ineffective, and undermine monetary and fiscal

### Effectiveness and macroeconomic consequences of price and interest rate caps
- Regulatory measures used in response to rising inflation and costs of living included caps on energy and food prices and selected retail interest rates.
- Key findings on effectiveness:
  - Sustaining artificially low prices prevents the demand adjustment needed to cool underlying pressures.
  - Price caps have not been effective in fighting inflation; price caps on selected food produces resulted in higher prices on other products to compensate losses.
  - Energy price caps prevented demand adjustment and led to wider external deficits and greater exchange rate depreciation, which increased inflationary pressure.
  - Interest rate caps undermine monetary policy transmission, disconnecting key channels and eventually requiring greater tightening to achieve the same outcome.
- Example of unsustainability and disruption:
  - The motor fuel price cap was abruptly terminated on December 6, 2022 after it had led to widespread fuel shortages.
- Risk to expectations:
  - By delaying the inevitable inflationary impact, price caps risk ultimately entrenching expectations higher, for longer.

### Fiscal and monetary policy interactions and recommendations
- Administrative measures (price and interest rate caps) work at cross purposes with fiscal and monetary tightening.
- Policy trade-off assessment under high uncertainty:
  - The potential costs of under-tightening (including entrenched high inflation and a higher eventual cost of controlling it) outweigh the risks of excessively lowering output through over-tightening.
  - On balance, it seems better to over- than under-tighten to stabilize inflation, re-anchor inflation expectations, and enable a stable environment for recovery.
- Recommendation:
  - To best complement monetary policy in its efforts to support the inflation target, consistency of fiscal policy is crucial while administrative measures should not undermine policy tightening.

### Appendix I — Phillips Curve model results (selected coefficients and diagnostics)
- Model scope: Europe, Emerging Europe, Advanced Europe and country-specific columns including BGR HRV HUN POL ROU.
- Selected estimated coefficients (robust standard errors in parentheses; significance: *** p<0.01, ** p<0.05, * p<0.1):
  - Unemployment Gap:
    - Europe: -0.374*** (0.078)
    - Emerging Europe: -0.676*** (0.179)
    - Advanced Europe: -0.337*** (0.097)
    - Hungary (HUN column shown among country group): -0.139-0.477 (standard-error formatting in source)
  - Lag of Core Inflation:
    - Europe: 0.431*** (0.127)
    - Emerging Europe: 0.581*** (0.105)
    - Advanced Europe: 0.287* (0.161)
    - Hungary: 0.920*** (0.056) and 0.426*** (0.106) in other columns
  - Inflation Expectations: 3 Years Ahead:
    - Europe: 0.569*** (0.127)
    - Emerging Europe: 0.419*** (0.105)
    - Advanced Europe: 0.713*** (0.161)
    - Hungary: 0.0800.574*** (0.056)(0.106) as presented in source
  - Lag of External Price Pressure:
    - Europe: 0.020*** (0.006)
    - Emerging Europe: 0.037** (0.015)
    - Advanced Europe: 0.009* (0.005)
  - Food price contemporaneous coefficient:
    - Europe: 0.127*** (0.034)
    - Emerging Europe: 0.181*** (0.054)
    - Advanced Europe: 0.065*** (0.015)
    - Hungary: 0.042** 0.109*** (0.018)(0.035) as presented in source
  - Lagged food price coefficients (selected lags):
    - Lag of Food Price:
      - Europe: 0.078*** (0.020)
      - Emerging Europe: 0.075*** (0.027)
      - Advanced Europe: 0.054*** (0.020)
    - L2 of Food Price:
      - Europe: 0.032 (0.022)
      - Advanced Europe: 0.045*** (0.015)
    - L3 of Food Price:
      - Europe: 0.070*** (0.021)
      - Emerging Europe: 0.065** (0.032)
      - Advanced Europe: 0.077*** (0.018)
    - L4 of Food Price:
      - Europe: 0.042** (0.017)
      - Emerging Europe: 0.053** (0.026)
      - Advanced Europe: 0.040** (0.019)
  - Energy Price:
    - Europe: 0.016 (0.011)
    - Emerging Europe: 0.021 (0.022)
    - Advanced Europe: 0.032*** (0.008)
- Observations:
  - Europe: 2,210
  - Emerging Europe: 503
  - Advanced Europe: 1,707
  - Country-level columns show smaller observation counts (e.g., 60, 60, 86, 86, 86 in source)
- Model fixed effects:
  - Country FE: Yes for regional columns; No for some country columns per source.
  - Time FE: No for all columns per source.
- Note: Source of model results is IMF Regional Economic Outlook for Europe, October 2022.

### Appendix II — Illustrative inflation risk scenarios (summary)
- Two modeling approaches reported: Phillips Curve Simulations (6-quarter horizon, shocks persist throughout) and DSGE Model Simulations.
- Baseline:
  - WEO July baseline: GAS (energy inflation 69% in 2022, -14.1% in 2023; food inflation 19% in 2022, 2.8% in 2023)
  - In Phillips curve simulations: Cost shock raises inflation to WEO baseline in 2022Q2.
- Scenario shocks (as labeled in Table A.II):
  0. Baseline (WEO) — see Baseline figures above.
  1. Negative supply shocks:
     - Phillips curve: 20 percent rise in energy and food prices.
     - DSGE: Additional inflationary cost shock matching initial shock in Phillips curve simulation.
  2. Positive supply shocks:
     - Phillips curve: 20 percent fall in energy and food prices.
     - DSGE: Deflationary cost shock matching initial shock in Phillips curve simulation.
  3. Looser labor market (More slack than estimated):
     - Phillips curve: 2 percentage points lower unemployment gap.
     - DSGE: 2 percentage points lower output gap than assumed by in monetary policy rule.
  4. Tighter labor market (Less slack than estimated):
     - Phillips curve: 2 percentage points higher unemployment gap.
     - DSGE: 2 percentage points higher output gap than assumed in monetary policy rule.
  5. Inflation expectations de-anchored:
     - Phillips curve: 1 percentage point higher expected inflation.
     - DSGE: Inflation expectations increase inflation in the first period by 1 percentage point.
  6. Increased persistence (Wage-price spiral):
     - Phillips curve: A rise in the coefficient on lagged inflation to 0.95.
     - DSGE: A rise in the coefficient on lagged inflation to 0.8.
- Note: DSGE = dynamic stochastic general equilibrium. Sources for scenarios include IMF, Regional Economic Outlook for Europe, October 2022; IMF, World Economic Outlook database; and IMF staff.

*Source: sipea2023004 - 17.      Price and interest rate caps are costly, ineffective, and undermine monetary and fiscal*

---


_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2023/english/sipea2023004.pdf_