The macro-economic impact of the cost crisis

Policy Brief

The surge of inflation in 2021-22 has become a major test for macroeconomic policies. Policy response has not always been adequate. This is partially due to an insufficient understanding of the causes of inflation but also rigidities on the part of policymakers, who have stuck to the usual tools of demand management to treat inflation shock, even though it was triggered by supply-side factors.

This experience points to the need to revise the ways we are dealing with inflation. One set of proposals is about the techniques of monetary policy itself, including data and modelling issues. The second set is about policy mix and coordination in dealing with inflation, bringing fiscal and other policies on board.

In this policy brief, we summarise the ideas explored in a seminar discussion organised by FEPS in collaboration with the Friedrich-Ebert-Stiftung and the European Institute at the London School of Economics and Political Science, we introduce the broader policy agenda and look at the data, modelling and policy mix that can instruct policymaking.