Moreover, a tight monetary policy that aims at countering the inflationary consequences of an adverse supply shock could be accompanied by a discretionary fiscal expansion, i.e. a reduction in tax rates or an increase in government spending. The latter policies might further contain the recessionary impact of the shock by offsetting the negative effect of the oil price rise on private demand.
Therefore, if government has the necessary flexibility, fiscal policy could lessen the stabilization burden of monetary policy. In the euro area, however, the scope for fiscal policy is, at present, limited because of the failure to tighten fiscal policy, during previous years when output was above trend. As a result, many countries have been left with significant fiscal deficits and high debt levels.