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ABOUT ME
STEFA N K A RL SSON
SWEDEN
I am an economist
currently working in
Server Sweden. I am an
S A T U R D AY, M AY 2 9 , 2 0 1 0
1 of 3 10-05-30 1:23 PM
Stefan Karlsson's blog: Fiscal Policy & Price Inflation http://stefanmikarlsson.blogspot.com/2010/05/fiscal-policy-pric...
However, this outcome presupposes two things. First of all, that fiscal
action do not have significant negative supply effects. If the effects on
supply is greater than the effects on demand, then price inflation will
not go down but in fact increase.
If on the other hand fiscal austerity have a positive supply effect, then
the inflation reducing effects from lower demand will be reinforced
further.
In the case of the euro area (or any other currency union, or group of
countries with fixed exchange rates), relative inflation within the euro
area will always be reduced (at least assuming that there isn't
significant supply reducing effects caused by tax increases) as a result
of fiscal austerity since there won't be any nominal exchange rate
movements within the euro area. Because the euro will probably
depreciate as a result of fiscal austerity, the net effect on inflation in
countries tightening fiscal policy will be uncertain, but it is certain that
it will raise inflation in countries that don't tighten fiscal policy.
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Stefan Karlsson's blog: Fiscal Policy & Price Inflation http://stefanmikarlsson.blogspot.com/2010/05/fiscal-policy-pric...
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