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

_IMF Working Papers, November 11, 2022_

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**Canonical URL:** [U.S. and Euro Area Monetary and Fiscal Interactions During the Pandemic: A Structural Analysis](https://www.imf.org/en/publications/wp/issues/2022/11/11/u-s-524029)

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## Bibliographic details
- Authors: Andrew Hodge, Zoltan Jakab, Jesper Lindé, Vina Nguyen
- Published: November 11, 2022
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400219818.001

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### Summary findings
- The paper employs a two-country New Keynesian DSGE model to assess macroeconomic impacts of changes in monetary policy frameworks and 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 boosts output and inflation in both regions.
- Moving from flexible to average inflation targeting in the U.S. boosts output and inflation in both regions.
- 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 monetary and fiscal policies is mutually reinforcing.
- These combined policy changes are insufficient to fully explain the unexpected increase in core inflation during 2021.

### Model, scenarios, and mechanisms
- Model: two-country New Keynesian DSGE model.
- Policy scenarios analyzed:
  - Change in euro area monetary policy from “below, but close to 2 percent” to a formal symmetric inflation targeting regime.
  - Change in U.S. monetary policy from flexible inflation targeting to average inflation targeting.
  - Fiscal packages in the U.S. and the euro area and pace of fiscal withdrawal in the euro area.
  - Simultaneous implementation of monetary framework changes and fiscal support.
- Mechanisms emphasized:
  - Monetary regime shifts raise expected inflation and stimulate output in both regions.
  - Fiscal stimulus and slower fiscal withdrawal operate through demand channels and produce effects comparable to monetary framework changes.
  - Interactions between monetary and fiscal policies are mutually reinforcing but do not fully account for the 2021 core inflation rise.

### Policy implications and emphasis for policymakers
- Monetary-policy-framework changes (formal symmetric inflation targeting in the euro area; average inflation targeting in the U.S.) can be effective at raising output and inflation across regions.
- Fiscal stimulus and the timing of fiscal withdrawal are powerful tools with effects comparable to monetary-framework changes.
- Coordinated monetary and fiscal action is mutually reinforcing and can amplify macroeconomic stabilization effects.
- Additional factors beyond the considered monetary and fiscal adjustments are needed to fully account for the unexpected rise in core inflation in 2021; policymakers should investigate supplementary drivers.

*IMF Working Paper: U.S. and Euro Area Monetary and Fiscal Interactions During the Pandemic: A Structural Analysis (Working Paper No. 2022/222).*

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_Source: https://www.imf.org/en/publications/wp/issues/2022/11/11/u-s-524029_