Prolonged and more effective fiscal stimulus may add to pent-up demand among households. In the euro area, broader discretionary fiscal stimulus is expected to amount to more than 4% of GDP in 2021, about 1.5% in 2022 and 1.25% in 2023, marking a sharp shift from the past when the fiscal stance detracted from, rather than added to, growth.
In particular, large public infrastructure programmes on both sides of the Atlantic, largely motivated by the urgency to accelerate the transition to a carbon-free economy, may give rise to upside potential for inflation in two complementary ways. One is through their effect on growth. There is a chance that fiscal multipliers associated with the “green” transition will be measurably higher than conventional multipliers.