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Fiscal policy staying the course in troubled times (Thygesen et al.)

Fiscal policy staying the course in troubled times by Niels Thygesen, Roel Beetsma, Massimo Bordignon, Xavier Debrun, Mateusz Szczurek, Martin Larch, Matthias Busse, Mateja Gabrijelcic, Laszlo Jankovics, Janis Malzubris published by VOXEU (6/2022).

The war in Ukraine has clouded the near-term economic outlook. However, the European Fiscal Board concludes that current policy plans for 2023 amount to a broadly appropriate fiscal stance for the euro area as a whole. A moderate fiscal contraction appears adequate despite the war. Indeed, the terms-of-trade shock magnified by the war amounts to an overall income loss that cannot be buffered by additional public debt accumulation. A fiscal stimulus would also undermine the ECB’s effort to better align aggregate demand with aggregate supply to tame inflationary pressures. Instead, fiscal policy should focus on targeted and temporary support to vulnerable households without prejudice of medium-term debt sustainability.

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