This paper uses a general equilibrium model for the euro area to assess the macroeconomic effects of monetary and fiscal measures introduced in response to a temporary increase in fossil fuel prices. The temporary fiscal measures are a reduction in excise duties on fossil fuels and increased transfers to poorer households.
Energy price shocks require an increase in the monetary policy rate to contain the effects on inflation, irrespective of the fiscal policy response, especially if price and wage setting decisions are not firmly anchored to the inflation target. A temporary reduction in excise duties on fossil fuel sources contributes to reducing the inflationary impact of shocks; an increase in transfers to the most vulnerable households supports consumption with a limited impact on inflation.
