Inflation and Fiscal Policy: in Search of a New Paradigm
Numerous fiscal tools have contributed to stabilizing inflation during recurring economic crises over the past fifteen years: price caps, economic stimulus, paid furloughs, tax credits, etc. These policies are consistent with recent studies showing that budgetary tools are powerful levers for stabilizing activity and inflation. A new framework for pragmatic coordination of budgetary and monetary policies is therefore required, which must adapt to the institutional frameworks of each country. In Europe, it has been proposed that independent fiscal institutes that are responsible for informing national parliaments be provided with inflation analysis goals and adequate analytical resources.
The relationship between fiscal policy and inflation is both fundamental and challenging to define. First and foremost, it is a fundamental subject: a resurgence of fiscal policy aimed at stabilising economies and inflation can be observed, alongside repeated calls for improved coordination between fiscal and monetary policies (Draghi, 2024). The subject is also difficult to narrow down due to its inherent general nature. Since the introduction of the first coin in Lydia in the 6th century BCE, governments have frequently altered the money supply as a means of financing their spending. This initial practice, known by various names such as inflationary tax, seigniorage, or fiscal dominance, persisted until the early 1980s. It was only with the establishment of central bank mandates that included clearly defined inflation targets. Between…