Fiscal policy design and inflation: The COVID-19 pandemic experience

The significant rise in inflation (nearly) worldwide has been associated with different shocks and a range of policy responses to the COVID-19 pandemic. We study how the design of fiscal support measures helps explain the origins of the post-pandemic inflationary bout by exploring the heterogeneity of fiscal support measures across 10 large economies. Because conventional measures of real activity were distorted in the early stages of the pandemic, we control for the underlying state of the real economy using household sentiment data. We find that five weeks following support announcements, fiscal support measures already had statistically and economically significant, albeit not large, inflationary effects. The magnitude of the effect was twice as large in an environment of improving consumer sentiment and, in that case, the effects did not differ significantly whether the fiscal support targeted consumers or firms. Moreover, the inflationary effect was larger and much more immediate if the support involved cash transfers. Our findings suggest that policy design mattered for the underlying inflationary pressures in the aftermath of the pandemic.