The study examined the effects of various demand factors, including fiscal and monetary policies, exchange rates, and supply constraints, on inflation. The results confirm that supply factors were the dominant cause underlying the increase in inflation in the euro area, whereas the exchange rate depreciations had a less significant impact.
If, on the other hand, budgetary provisions are exceeded, higher spending and widening of the fiscal deficit have, as experience has shown, inflationary consequences, and possible spillovers that could undermine external viability (the twin deficit argument). Also, research points to adverse welfare effects because, ultimately, loan waivers involve a transfer of resources from tax payers to borrowers. Consumption redistribution effects have also been reported.